If you’re a homeowner who has paid down a chunk of your mortgage or whose house has gained value, you might be able to take out a loan secured by your home equity. However, having equity in your home isn’t the only requirement to qualify for a home equity loan. There are also rules about your credit score, debt levels, and more.
Home equity describes the difference between the value of your home and your outstanding mortgage balance. For example, if your home is worth $400,000 and you still owe $300,000, you owe 75% — meaning you have 25% equity. In this case, you’d have $100,000 in equity.
A home equity loan is a type of second mortgage that allows you to borrow against the equity in your home. It is a secured loan, so it uses your house as collateral.
These loans typically have fixed interest rates, and the proceeds are disbursed as a lump sum after closing. To repay a home equity loan, you will make regular monthly payments that are amortized over the repayment term, which can be as long as 30 years.
The amount of money you can access through a home equity loan depends on how much equity you have in your home, your home’s value, your existing mortgage balance, and your lender’s unique requirements.
Borrowers must meet several essential lending criteria to qualify for a home equity loan. While the specific requirements vary from one home equity loan lender to another, there are typical standards you must meet to qualify for a home equity loan.
Most lenders offer home equity loans only to homeowners with at least 15% to 20% equity in their homes. For example, let’s say your home is currently worth $400,000, and you owe $350,000 on your mortgage. Most lenders wouldn’t allow you to take a home equity loan because you’ve only accrued $50,000 in equity, which is 12.5%.
A homeowner with a house valued at $400,000 would need at least $60,000 to $80,000 in equity to reach the minimum 15% to 20% required by most lenders.
Also, most lenders won’t allow you to borrow more than 80% of the equity you have built in your home. So, if you have $80,000 worth of equity in your home, your lender will generally cap your home equity loan at $64,000 — or 80% of the $80,000 in equity you have.
Lenders need to trust that you will repay your home equity loan. That’s part of why they set minimum credit scores.
Generally speaking, higher scores indicate that you manage your debts responsibly and pay your bills on time, while lower scores tend to signal the opposite, making you riskier for lenders to approve.s
Though credit requirements for home equity loans vary by lender, the typical minimum required credit score is 680. However, an even higher credit score can help you qualify for lower interest rates and better terms.
Lenders also set debt-to-income (DTI) ratio requirements. Your DTI reflects how much of your monthly pre-tax income goes toward mandatory debt payments — such as student loans, car payments, or minimum credit card payments.
Lenders typically prefer a DTI ratio of 43% or less, though some will require a slightly lower or higher ratio. As with higher credit scores, though, a lower DTI ratio will often increase your chances of getting a better interest rate and term. Higher DTI ratios, which mean you have a lot of money going toward debts each month, can mean the opposite.
You will need to provide income verification to qualify for a home equity loan. The mortgage lender requires proof that you earn enough to afford the payments on your home equity loan, and that you’ll continue to have that income for the loan’s term. You may need to provide pay stubs, W-2s, or tax returns to prove your income level.
Homeowners insurance doesn’t just protect you against an unexpected loss — it also protects your lender in case something happens to your home. This is why mortgage lenders require homeowners to carry appropriate insurance as a loan condition.
It’s the same for home equity loans. To qualify for a home equity loan, you must provide proof of your current homeowners insurance policy. Your insurance policy protects the lender’s investment in your home in case of a disaster.
Home equity loans usually require an appraisal to determine the home’s current market value. The home appraisal ensures the mortgage lender knows exactly how much equity you have in the house. That way, the lender can protect itself from loaning a borrower too much money.
Some lenders offer no-appraisal home equity loans. As the name suggests, they don’t require a formal appraisal of your property. In some cases, the lender will use public data or an automated valuation model (AVM) to determine your home’s value instead. In others, they may use a prior appraisal, comparable sales data, or local tax assessments.
You’ll need to submit several forms of documentation when applying for a home equity loan, and preparing this early can help the process go more smoothly. The exact documents you’ll need depend on the lender you work with, but most borrowers will require the following to qualify for a home equity loan:
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Your most recent mortgage statement: This document displays the remaining balance on your primary mortgage.
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Proof of income: This might include your most recent tax return, W-2s, and pay stubs. You’ll also need proof of employment.
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Bank statements: The mortgage lender may want this information to determine your cash reserves before you take on more debt.
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Insurance documentation: The lender will need a copy of your homeowners insurance policy and any hazard or flood policies.
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Identification: You will also need to have your Social Security number, driver’s license, or passport on hand.
How much can you borrow with a home equity loan?
If you’re worried about qualifying for a home equity loan, here are some steps you can take to improve your chances:
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Improve your credit score: The better your credit score, the easier it is to qualify for any loan. A score of at least 680 should help you qualify, and an even higher score could result in a lender offering you better terms.
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Reduce your debts: Paying down your debts lowers your DTI ratio, making it easier to qualify. It may also make you eligible for a higher loan amount.
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Increase your income: A higher salary also lowers your DTI ratio. You may be able to achieve this by asking for a raise, taking on more hours, or picking up a side gig or freelancing work.
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Increase your home equity: When you add value to your home, you increase your equity stake, which makes it easier to qualify for a home equity product. Redoing your kitchen, adding another bedroom, installing a patio, and other home projects are all examples of how you might increase your property’s value.
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Shop around for a lender: Requirements can vary widely by home equity loan lender. It’s possible you may qualify with one lender and not another.
You can also talk to a mortgage professional. They can review your current finances and make recommendations to improve your chances of getting approved.
A home equity loan lender could deny your application for various reasons. Lenders might turn down homeowners with insufficient equity, even if they might otherwise qualify. But having enough equity in your home doesn’t guarantee a loan. If your credit history is poor, you have a high debt-to-income ratio, or you can’t prove that you have enough income to repay your loan, a lender might reject your home equity loan application.
Usually, yes — most lenders require an appraisal for a home equity loan because it assesses how much your home is worth, which helps determine how much equity you have to borrow from. Some lenders do offer no-appraisal home equity loans. These often use automated valuation models (AVMs), public data, or comparable sales to determine a home’s value instead.
Yes, the term “second mortgage” refers to any new loan you take out using your property as collateral when you already have a first mortgage secured by the home. Second mortgages add an additional monthly payment to your household.
Not having enough equity in your home can disqualify you from getting a home equity loan. Having a low credit score, high debt-to-income ratio, or low home value can also make it hard to get a home equity loan.
It depends on the interest rate and loan term you qualify for, but a 30-year $50,000 home equity loan at an 8% rate would come with a monthly payment of about $367.
Home equity loan requirements vary by lender. Generally, though, you will need sufficient equity in your home, a good credit score, a low debt-to-income ratio, and stable income to get approved for a home equity loan.
Laura Grace Tarpley edited this article.
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