Once you’ve got an idea of how much equity you can access, the next thing you’ll need to know is how to qualify for a home equity loan or HELOC. Below are the minimum requirements for a home equity loan or a HELOC.
Like any mortgage loan, you’ll need to qualify based on an analysis of your debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and your credit score. We’ll briefly explain what each of these qualifying concepts mean.
Lenders look at how much total debt you have compared to your pretax income, including your house payment and other monthly debt such as credit cards and car loans. The most common suggested DTI maximum is 43%, but some lenders may allow you to go up to 50% if you have a high credit score.
LTV is a calculation based on the total loan amount you are taking out compared to your property’s total value. With a home equity loan or HELOC, you may need your combined loan-to-value (CLTV) ratio. This is how much equity you are borrowing between your current mortgage and your new home equity loan or HELOC.
For example, if you have a $200,000 home with a $100,000 current balance, your LTV is 50% ($100,000 divided by $200,000). However, if you borrow another $60,000 with a home equity loan or HELOC, your CLTV is 80% ($100,000 plus $60,000 = $160,000, divided by $200,000 = 80%).
Most lenders suggest a maximum CLTV of 80%, although some home equity loan lenders may allow you to borrow up to 100% of the value.
Your maximum home equity loan or HELOC loan amount will vary depending on your credit score. You’ll get the best rates and maximum borrowing power with a score of 760 or higher. If you’re between 700 and 759, you’ll still get the maximum — but at higher interest rates.
If you’re between 620 and 700, you can expect further limits, which may significantly reduce the dollar amount of equity you can access.