HELOC and Home Equity Loan Requirements in 2024

Vault’s Viewpoint on HELOC Requirements

• Lenders will check your credit score, DTI ratio and income to see if you qualify for a home equity loan or HELOC.
• The amount you can borrow is based on your home equity, which is your home’s current market value minus any outstanding mortgage balance. 
• You might not be able to tap equity on some types of properties. 

Home Equity Loan vs. HELOC

A home equity loan and a home equity line of credit (HELCO) both allow you to borrow money using your property to secure the loan. The key difference between the two is how they’re structured.

A HELOC is a line of credit that allows you to borrow up to a prespecified amount, repay some or all of the balance and borrow again. This “draw period” usually lasts up to 10 years and typically comes with a variable APR. After the draw period ends, you can no longer use the account. You’ll either need to pay the balance in full or over a repayment period that lasts around 10 to 20 years. 

A home equity loan is a bit more simple because you receive all of the funds upfront. Then you start making installment payments over a loan term, such as five to 30 years, with a fixed interest rate and fixed monthly payment. 

Both HELOCs and home equity loans allow you to use the funds for any purpose, such as debt consolidation or home improvements. Because both types of loans are secured against your property, they may offer lower interest rates compared to unsecured forms of lending such as personal loans and credit cards. But you risk losing your home to foreclosure if you default on payments. 

Home Equity Loan and HELOC Requirements in 2024

The requirements to get a home equity loan or HELOC are very similar. Here’s what the lender may look for:

Home Equity: 10% to 15%

Many lenders require you to keep some equity in the home after you take out your loan. The requirement varies with each lender, but it often ranges from 10% to 15%. You’ll typically see the limit written as a maximum loan-to-value (LTV) ratio. For instance, if your lender has a maximum 90% LTV ratio, the combined balances of your first mortgage and the home equity loan can’t exceed 90% of your home’s value. That leaves 10% equity in your home after accounting for both mortgages. 

A home equity loan or HELOC that exceeds 90% LTV is usually considered a high-LTV loan. These may come with a higher interest rate.

Appraisal: Satisfactory

During the application process, your lender may order an appraisal. This is a professional opinion of your home’s value, and it helps determine the amount of home equity you have and the amount you can borrow. 

Lenders may also verify that your property is in average (or better) condition with no major damage. They want to know that if you default on your loan payments, they can sell the home and recoup their costs.

Debt-to-Income Ratio: 50% or Less

Your debt-to-income (DTI) ratio shows lenders how much of your monthly income goes toward paying off debts. Checking your debt relative to your income helps the lender determine you only borrow what you can afford to repay.

For example, let’s say your household income is $10,000 a month before taxes. You spend $3,500 a month on your first mortgage, credit cards and student loans. Your debt-to-income (DTI) ratio would be calculated as:

$3,500 / $10,000 = 0.35 or 35%

Typically, your total debt (including the home equity loan or the HELOC payment) should account for no more than 50% of your pre-tax income. Some lenders may set a lower DTI limit. 

Credit Score

Your credit score is a number that’s designed to reflect how well you’ve managed debt in the past. The most popular scores, the VantageScore and FICO Score, range from 300 to 850. Generally, having strong credit can help you qualify for a home equity loan or HELOC and receive good terms. Some lenders require a score of at least 620 or 640, though the limit rises to 660 or 680 in many cases.  

Credit History

Lenders also review your credit reports to check whether you’ve consistently paid your bills on time. The lender may also review other debts on your credit reports to verify your monthly payments, how long the accounts have been open and when you’re scheduled to pay off those debts. These factors help the lender determine your reliability as a borrower and whether you have room in your budget for a new debt payment. 

Proof of Income

Be prepared to hand your lender documents that show you’re employed and the amount you earn. These documents help show you can repay the money you’re borrowing. Depending on the lender’s requirements, you may need to provide copies of the following:

• Pay stubs from the previous month
• Form W-2 from the previous year
• Bank account statements from the previous two months
• Mortgage statements for all properties owned
• Tax returns from the previous two years (if self-employed) 
• Account statements for current debts 
• Retirement award letter or 401(k) distribution letter

Property Type

Lenders may set restrictions on the type of property you can use to take out a home equity loan or HELOC. Each lender may set its own rules, but the following property types are usually acceptable:

• Single-family homes
• Condos 
• Townhomes 
• Planned urban developments

And the following property types may or may not be acceptable for a home equity loan or HELOC:

• Co-ops
• Timeshares 
• Mobile homes
• Properties currently listed for sale
• Commercial properties
• Undeveloped property
• Properties with more than a specified number of units
• Properties with title changes in the past 90 days
• Homes in poor condition
• Manufactured housing
• Earth, dome or log homes
• Houseboats
• Mixed-use properties

Additionally, you might be limited to borrowing against your primary residence. But some lenders allow you to tap equity from a vacation home or investment property, which gives you more options to choose from. 

How Much Can I Borrow?

HELOCs and home equity loans typically allow you to borrow 85% to 90% of your home’s value, minus the balance on your first mortgage. Your financial standing also influences the amount you can borrow, but you can estimate your maximum borrowing power with just a few simple steps:

Check Your Home’s Value and Current Mortgage Balance

You can estimate your home’s market value using a website like Zillow, Redfin or Realtor.com. (Remember that your lender’s appraisal may differ from the estimate you find online.) Your mortgage loan balance should be listed on your most recent loan statement, or you can call your lender and ask. 

For our example, let’s say your home is worth $500,000 and your mortgage balance is $300,000.

Calculate Your Maximum Potential Debt

In this step, you’ll calculate the maximum debt that can be secured by your home. Do this by multiplying your home’s market value by the lender’s combined LTV limit. Let’s say your lender allows a maximum LTV of 85%. Here’s how you’d run the calculation:

$500,000 x 0.85 = $425,000

Determine Your Potential Borrowing Power

Next, you’ll subtract the balance on your first mortgage to see how much you can borrow (if you qualify). Take the maximum debt that can be secured by your home and subtract the balance of your first mortgage from it:

$425,000 – $300,000 = $125,000