Home equity loan and HELOC requirements in 2022
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Home equity is the difference between the value of your home and the amount owed on your mortgage. Your net worth can change in two ways: by paying off your mortgage or when the value of your home increases.
You can tap into the equity in your home to fund various expenses, such as home renovations, medical bills, and financial emergencies.
Two popular ways to access the equity in your home are through a home equity loan or a home equity line of credit (HELOC). Each option has its own advantages and disadvantages. The requirements to qualify for a home equity loan vary by lender, but there are some general guidelines you’ll need to follow if you’re seeking approval.
A cash refinance is another way to leverage the equity in your home. Credible, it’s easy to compare mortgage refinance rates from several lenders.
Requirements to leverage the equity in your home
For the most part, the requirements for home equity loans and HELOCs are generally the same. What is required can often depend on the lender and their underwriting standards. Here is an overview of the common requirements to qualify for a home equity loan or HELOC.
Equity in your home
In many cases, lenders will only allow you to borrow up to 80% of the equity accumulated in your home minus the amount you owe, but some lenders have lower or higher borrowing limits.
If you haven’t accumulated a lot of equity yet, tapping into it might not make much sense. Lenders generally require that you have at least 15-20% of the equity in your home to qualify for a HELOC or home equity loan.
Debt-to-income ratio (DTI)
Lenders also consider your debt-to-equity ratio when approving loan applications. The DTI ratio compares your monthly income to recurring monthly debts. The lower your DTI ratio, the less you turn to lenders. Lenders generally seek borrowers with a DTI ratio below 43%, but often require a DTI ratio below 36%.
To calculate your debt-to-equity ratio, add up your mortgage payment, outstanding loans, credit card bills, and other recurring monthly expenses. Divide this number by your monthly income and multiply it by 100 to get your DTI percentage.
Lenders’ credit score requirements can vary, but you’ll generally need a FICO score in the mid-600s to qualify for a HELOC or home equity loan.
The higher your credit score, the more likely you are to qualify for a loan and get a lower interest rate. Credit scores play an important role in determining rates on all loan products.
Lenders want to reduce their risk by ensuring that you will make your payments each month.
To do this, lenders look at your credit history. This allows them to see your on-time payment history, current debts, and other financial obligations. Your credit score is a quick indicator of your financial and credit history, but lenders use your credit report to dig into your past to determine if you’re a low-risk borrower. Your credit history also plays a role in the interest rate you will receive.
Verification of employment and income
Lenders also assess your income to make sure you are making enough money to cover the repayment. It is also a factor that determines how much you can borrow.
To verify your income, lenders may ask you to provide documents, such as:
- tax returns
- Bank statements
You can compare mortgage refinance rates all in one place with Credible.
Home Equity Loan vs. HELOC
A home equity loan is a loan secured by the equity accumulated in your home. Sometimes called a second mortgage, a home equity loan is distributed to you in a lump sum that you repay in installments over a set term, usually between five and 30 years. Loan limits are based on the difference between the current market value of the home and the remaining balance on your mortgage.
A home equity line of credit is a line of credit secured by the equity in your home. HELOCs usually have a credit limit and work like a credit card. You can use a HELOC up to your credit limit for any expense during the HELOC draw period. Your lender only charges interest on the portion of your HELOC that you spend during this time. Once the drawdown period is over, you will enter the repayment period, where you will repay the remaining balance in installments over a fixed number of years.
HOME CAPITAL LOAN VS. HELOC: HOW TO CHOOSE WHAT’S RIGHT FOR YOU
Benefits of a home equity loan
Home equity loans offer distinct advantages over other loan products:
- Fixed rates — Unlike HELOCs, which typically have variable interest rates, home equity loans come with fixed interest rates. No matter what, your rate will not change during the refund.
- Predictable payments — With a fixed interest rate, your payments won’t change for the life of the loan.
- Fiscal advantages — You can deduct interest from your loan if you use it to make improvements to your home.
- Lower rates — Home equity loans often come with lower rates than unsecured loans because your home serves as collateral.
Benefits of a HELOC
HELOCs offer unique benefits that make them an attractive option for owners:
- Interest rate options — While HELOCs typically come with a variable interest rate, some lenders allow you to convert to a fixed rate option.
- Pay only what you spend — With a HELOC, you only have to make principal and interest payments on what you spend. You can take out a HELOC without actually using it.
- Can use the money for anything — Unlike other loans, there’s no limit to how much money you can spend with a HELOC.
- Higher borrowing limit — HELOCs generally offer higher borrowing limits than credit cards or personal loans.
If you decide that a cash-out refinance is a better fit for your financial goals, start with compare mortgage refinance rates from multiple lenders with Credible.