Home equity loan requirements: What you need to qualify

Written by: Taylor Medine
• Updated •6 min read
This date may not reflect recent changes in individual terms.
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In a Nutshell

Homeowners typically need a combined loan-to-value, or CLTV, of at least 80% to qualify for a home equity loan. This means a maximum of 80% of your home is financed, and you have at least 20% equity in the home to borrow from. Having strong credit and a low debt-to-income ratio can also help you get approved.
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Home equity loan requirements can vary — but having strong credit and a low debt-to-income ratio can increase your likelihood of approval.

Like other types of loans, lenders measure your credit, income and current debt load to determine if you qualify for a home equity loan. But since your house secures this type of loan, how much equity you have also plays a role in your approval. We’ll cover home equity loan requirements to help you decide if it’s the right loan for you.

What is a home equity loan?

A home equity loan, or a second mortgage, is an installment loan that lets you draw from home equity. Interest rates are typically fixed, with terms of up to 30 years.

Since home equity loans let you borrow money in a lump sum, they can be a good way to pay for expenses where you need a specific amount, like consolidating credit card debt or paying a contractor for a home project.

Home equity loans and home equity lines of credit differ in a couple of ways: HELOCs offer a credit line with a limit you can draw from on an ongoing basis, and interest is only charged on the amount you borrow. HELOCs can be a good alternative when you need money continuously, like if you’re making ongoing repairs to a home.

How does a home equity loan work?

Home equity loans allow you to access money, dispensed as a lump sum, from the equity you’ve built in your home. This money doesn’t even have to go toward home-related expenses either. When you get a home equity loan, your lender will go over repayment terms, interest rates and closing costs for your loan during the approval process.

How much can you borrow with a home equity loan?

With home equity loans, the rule of thumb is that you can borrow up to 80% of the equity in your home. In some cases, you may be able to borrow up to 100% of your equity. Borrowing a higher amount can be risky, though, because a decrease in the value of your home could result in you going underwater, meaning you owe more on the home than it’s worth.

What are the requirements for a home equity loan?

When reviewing your application for a home equity loan, lenders will measure your home’s value, your credit, and your ability to keep up with payments. While requirements can vary, here are the general guidelines for a home equity loan.

Credit scores of 620 or higher

You generally need credit scores of 620 or above to get a home equity loan. But getting approved with higher credit scores can be easier than with lower scores, and having good credit could also lower your interest rate.

In some cases, lenders may offer home equity loans to borrowers with credit scores of 619 or below, but these loans can cost more over the life of the loan. And being unable to keep up with high home equity loan payments could put you at risk of losing your home, so it’s important that payments are affordable.

At least 20% equity in your home

You generally need a combined loan-to-value, or CLTV, of at least 80% to qualify for a home equity loan. This means a maximum of 80% of your home is financed, and you have at least 20% equity in the home to borrow from. That said, requirements vary widely by lender. If you don’t have 20% equity built up, waiting until you’ve paid down your mortgage further could help you qualify for a home equity loan down the road.

DTI ratio under 43%

Your debt-to-income ratio shows how much of your monthly income goes to debt payments. A high DTI can signal to lenders that you have many debt obligations and could have trouble paying for a new loan.

For home equity loans, the DTI requirement is typically 43%, but can be higher. You can calculate your DTI by totaling your monthly debt payments and dividing that sum by your monthly income. Then multiply that by 100 to get a percentage. If your DTI is above 43%, paying down debt to eliminate debt payments or increasing your monthly income could lower your DTI.

What can you use a home equity loan for?

You can use home equity loans for things like debt consolidation, emergency bills, major purchases, medical treatments or home renovation. If you use a home equity loan to pay for renovations or upgrades on the home securing the loan, interest may qualify for the mortgage interest tax deduction.

In comparison, personal loans may have some limitations. For example, you may be unable to use a personal loan for college tuition costs, while home equity loans don’t have the same restrictions.

Advantages and disadvantages of a home equity loan

If you’re considering applying for a home equity loan, here are the pros and cons to consider.

Advantages of a home equity loan

  • Low interest — Since your home secures a home equity loan, it’s a lower-risk loan to fund than unsecured loans that don’t require collateral. For this reason, home equity loans can have lower interest rates than other personal loans and credit cards.
  • Long loan terms — Loan terms may be as long as 30 years, allowing you to spread out your payments.
  • Flexibility — You can use the amount you borrow for many different types of expenses.

Disadvantages of a home equity loan

  • Lowers equity — Borrowing from home equity lowers your ownership stake in the home. And if you sell, the loan will have to be repaid, which can lower the amount you get from the sale.
  • Foreclosure risk — Taking out a second mortgage against your home adds another debt payment to your budget, and if you can’t pay it, your lender could foreclose on your home.
  • Fees — While some lenders may not charge fees to process your loan, others may have closing costs ranging from 2% to 6%.
  • Long application process — Getting a home equity loan may require an appraisal to determine how much your home is worth. Compared to an unsecured loan that could be funded within a few days, a home equity loan’s application and closing process can take a month or more. For example, Discover home equity loans can take 55 days to process from application to close.

Which one is better: A home equity loan, HELOC or cash-out refinance?

HELOCs are lines of credit borrowed against the equity you have in your house. You can borrow up to a certain limit for a fixed time before having to pay it back. It functions similarly to a credit card, but often you won’t have to start repaying it right away — even for years, depending on the terms of your HELOC. Home equity loans are similar to HELOCs, but you receive your money in a lump sum and will need to start making payments immediately. 

A cash-out refinance allows you to take out a new mortgage, for more than you owe on your current one, in order to keep the difference in cash. But since you’re refinancing your mortgage, your interest rates may change and you’ll have to pay closing costs. 

Whether a home equity loan, HELOC or cash-out refinance is best for you depends on your individual situation. Each product has different terms and uses so be sure to evaluate what may fit best with your needs. 

FAQs about home equity loan requirements

What is the minimum credit score for a home equity loan?

The minimum credit score for a home equity loan is typically 620, but minimum requirements can vary. How much you can borrow and your interest rate can also depend on your credit.

How hard is it to get an equity loan?

Getting a home equity loan can be more cumbersome than getting a personal loan since the lender has to determine the value of your home, and it could take several weeks to close on the loan. You also must have enough equity in your home to borrow from. If you just recently purchased a home and have less than 20% equity in it, you may not qualify.

How much money can I borrow with a home equity loan?

Usually, you can borrow up to 80% of your equity, but some lenders will let you borrow up to 100%.

Next steps

If you’re considering taking out a home equity loan, the first step is calculating your equity and checking your credit score to see where you stand. From there, shop around with different lenders to check rates, fees and funding timelines. If you need faster cash than a home equity loan can offer (or you don’t have equity to borrow from), unsecured personal loans could be another way to borrow money for personal expenses.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.