Home Equity Loan Requirements: 6 Qualifications

What’s a home equity loan?

A home equity loan lets you borrow money using the value you’ve built up in your home as collateral. You get the money upfront as a lump sum and pay it back over time with predictable monthly payments, usually at a fixed interest rate. Homeowners often use it for big expenses like renovations, paying off debt, or covering major purchases.

Another type of loan that uses your home equity is a home equity line of credit, more commonly known as HELOC. It works like a credit card backed by your home, letting you borrow money as needed instead of giving you one lump sum upfront. You only pay interest on the amount you use, but a HELOC usually has variable rates, so your payments can change over time.

Both of these lending options are considered a second mortgage that adds another mandatory monthly payment to your finances.

Compare your loan needs: The average home equity loan amount offer was $144,429 in the first quarter of 2026. Meanwhile, the average HELOC balance is about $52,347.

What are the home equity loan requirements?

To get approved for a home equity loan, lenders typically check a few key things about your finances. Meeting these requirements can improve your chances of getting approved and may help you qualify for better loan terms.

1. Good credit score

A strong credit score is a crucial factor in qualifying for a home equity loan. Most lenders require a minimum of 620, but having a higher score can improve your chances of approval and help you secure a lower interest rate.

To check your credit score, you can use free services from major credit bureaus or online platforms. If your score is lower than desired, consider steps to build credit fast, such as paying down existing debt, disputing any errors on your credit report, and ensuring all bills are paid on time.

2. Low debt-to-income (DTI) ratio

Lenders typically look for a debt-to-income (DTI) ratio of 43% or less. This ratio compares your monthly debt payments to your gross monthly income. A lower DTI shows that you have more room in your budget and can make you a stronger candidate for a loan.

To calculate your DTI, add up all your monthly debt payments and divide by your gross monthly income. For instance, if you pay $2,000 in debt payments each month and earn $5,000, your DTI is 40%.

Keeping your DTI ratio low can make it easier to qualify for a home equity loan and shows lenders that you can comfortably take on additional debt.

3. Favorable payment history

A favorable payment history shows lenders that you’re a responsible borrower. Making on-time payments on your debts, including credit cards, personal loans, and mortgages, can help build trust and improve your chances of qualifying for a loan.

Lenders check your credit report to see how consistently you’ve paid your bills and whether you have a history of making payments on time. If you’ve had late or missed payments in the past, showing recent improvements or explaining what happened can help provide more context.

4. At least 20% equity in your home

Your home equity is the difference between your home’s current value and the amount you still owe on your mortgage. This affects your loan-to-value ratio (LTV), which lenders use to determine how much you may be able to borrow. To calculate your LTV, divide your remaining mortgage balance by your home’s appraised value.

If your loan balance is $150,000 and an appraiser values your home at $450,000, you would divide the balance by the appraisal for an LTV ratio of about 33%. This means you have 67% equity in your home.

Most lenders require you to maintain a minimum of 20% equity, although some allow 15%. A loan with a ratio below 10% is called a high-LTV loan and usually comes with higher interest rates and a greater risk of denied funding.

5. Stable and sufficient income

Lenders want to make sure you have a steady income that’s enough to handle your loan payments. You’ll typically need to provide proof of income, such as pay stubs, tax returns, and employment history. They’ll also look at how stable your job and income have been, along with your other financial obligations, to determine if you can comfortably take on the loan.

6. Proof of homeowners insurance

Having homeowners insurance is a must when applying for a home equity loan. It protects your home from potential damage or losses and helps protect the lender’s investment as well. You’ll need to provide proof that your policy is active and has enough coverage, which can include a declaration page, a copy of your policy, or a letter from your insurance provider or agent.

Keeping your home properly insured not only helps you meet the lender’s requirements but also gives you peace of mind knowing your property is protected.

HELOC requirements: The requirements for a HELOC are generally similar to those for a home equity loan. However, some lenders may have slightly different criteria, like lower credit score requirements or different income guidelines, especially if you already have an existing relationship with them.

How much of my home’s equity can I borrow?

The amount of equity you can borrow depends on your home’s value and your current mortgage balance. Most lenders allow you to borrow up to 85% of your home’s equity. To determine this, lenders calculate your combined loan-to-value (CLTV) ratio, which includes both your first mortgage and the home equity loan or HELOC.

Let’s use our example home from above valued at $450,000. Your primary mortgage balance is $150,000. This means you have $300,000 in equity, equal to 66.7% of your home’s total value. However, you can’t borrow the full $300,000. As noted above, most lenders require you to keep at least 20% equity in your home, which means your total loans typically can’t exceed 80% of your home’s value.

To determine the maximum amount you can borrow, you must account for the loan-to-value ratio we discussed. If your lender requires that your debts not exceed 80% of your home’s worth, that comes to $360,000. You already owe $150,000 on your first mortgage. So, subtracting your current mortgage from your maximum CLTV of $360,000:

$450,000 x 0.8 = $360,000 – $150,000 = $210,000

In this example scenario, you could potentially borrow up to $210,000 of your home’s equity.

»Learn more: Now that you know how lenders calculate how much equity you can use, see how the numbers apply to your own home. Use our Home Equity Calculator to estimate how much you may be able to borrow based on your home’s value and current mortgage balance.

How much does a home equity loan cost?

The cost of a home equity loan includes interest rates, closing costs, and possible fees. Interest rates are generally fixed and can range from 8% to 10%, depending on your credit score, loan amount, lender policies, and your existing relationship with the lender.

Closing costs can include application or origination fees, title search fees, appraisal fees, and attorney fees (when required), usually totaling 2% to 6% of the loan amount. For example, if you take out a home equity loan of $80,000, you can expect to pay between $1,600 and $4,800 in closing costs.

Some lenders may also charge annual fees or prepayment penalties. It’s wise to compare rates and offers from multiple lenders to find the most cost-effective option.

Home equity loan payment examples

*Interest rate from the U.S. Bank

HELOCs come with many of the same costs as home equity loans, but there are a few key differences. Since HELOCs usually have variable interest rates, your monthly payments can change over time, and you may also have to pay fees like annual fees or transaction fees. Many HELOCs also have a draw period when you can borrow money, followed by a repayment period when you pay back what you borrowed plus interest.

What are the drawbacks of a home equity loan or HELOC?

While home equity loans and HELOCs can help you access a good amount of cash, they’re not without risks. Since your home is used as collateral, you could put your home at risk of foreclosure if you’re unable to make your payments.

With a home equity loan, your monthly payments stay the same, but they could become harder to handle if your finances change. A HELOC can be more flexible, but because its interest rate can change, your payments may increase over time.

Both options also add more debt to your plate, so it’s important to make sure you can comfortably afford the payments before using your home’s equity. Take some time to weigh the benefits and risks before deciding if either option is right for you.

Which is better, home equity loans or HELOCs?

The right choice between a home equity loan and a HELOC depends on your financial situation, how much flexibility you need, and how you plan to use the funds.

• A home equity loan is a good option for large, one-time expenses because you get a fixed interest rate and predictable monthly payments.
• A HELOC, on the other hand, gives you more flexibility by letting you borrow money as needed, making it a better fit for ongoing expenses or projects. Just keep in mind that HELOCs usually have variable interest rates, so your payments may change over time.

Start your home equity loan journey prepared. Our blog How Do I Get a Home Equity Loan? breaks down the application process, from checking your eligibility to closing on your loan, so you can apply with confidence.

What are the drawbacks of a home equity loan or HELOC?

While home equity loans and HELOCs offer access to significant funds, they come with potential drawbacks. Both options use your home as collateral, meaning you risk foreclosure if you fail to repay the loan.

Home equity loans have fixed monthly payments, which can be a strain if your financial situation changes. HELOCs, with their variable interest rates, can lead to unpredictable payment amounts.

Additionally, both types of loans increase your overall debt load, which can impact your financial stability. Consider these risks carefully and ensure you can manage the repayments before borrowing against your home’s equity.

What are some alternatives to home equity loans and HELOCs?

• Cash-out refinance: This can be a good option if you need a large amount of cash upfront. With a cash-out refinance, you replace your current mortgage with a new one for a higher amount, then take the difference as cash. Keep in mind that you’ll be refinancing your entire mortgage, which means getting a new loan term, new interest rate, and updated loan agreement.
• Personal loan: This option is often used by borrowers with good credit scores who perhaps lack equity or other collateral. These loans typically have higher interest rates.
• Reverse mortgage: A reverse mortgage lets homeowners age 62 and older access some of their home equity without having to make new monthly mortgage payments. It can be a good option if you plan to stay in your home for many more years and want to use some of the value you’ve built up. There are even reverse mortgage programs that can help you buy a new home.
• Retirement plan loan: Some retirement plans, such as a 401(k), allow you to borrow from your retirement savings. The loan amount may be limited to a percentage of your vested balance or a capped dollar amount.
• Government loans: Some government programs can provide financial assistance for home repairs and improvements, potentially offering better terms than traditional home equity loans.

Less common alternatives to home equity loans and HELOCs

• Home equity sharing agreement: Also known as a home equity agreement (HEA), this is a no-loan option for homeowners with equity who need a lump sum of money without monthly payments. You’ll need some upfront cash and be willing to share a portion of your home’s future equity appreciation with an investment company.
• 0% introductory rate credit card: This personal line of credit can be a short-term option if you can’t qualify for a traditional HELOC because you don’t have enough home equity. This option works best if you can take advantage of a promotional zero-interest offer.
• Rent-back agreement: After selling your home, a rent-back agreement lets you stay there for a set period while you use the sale proceeds to plan your next move. It can give you extra time to find a new place to live or buy your next home without having to rush the process.

“Buy Before You Sell” program

If you’re thinking about using your home equity to help buy your next home but want to avoid the hassle of moving twice, there’s a modern option that lets you buy first and sell later.

HomeLight’s Buy Before You Sell program makes it easy to use the equity from your current home to make a strong, non-contingent offer on a new home. This innovative program lets you streamline and simplify the entire buying and selling process.

Watch the video below to learn how HomeLight Buy Before You Sell works:

If your home qualifies, you can get your equity unlock amount approved in 24 hours or less. No cost or commitment is required. Once approved, you can buy your next home with confidence and then sell your current home with peace of mind.

Should I get a home equity loan or HELOC?

Deciding whether to get a home equity loan or HELOC depends on your financial situation and needs. An equity-backed loan may be a good option for you if:

• You can afford your mortgage and additional expenses: Make sure your income is steady and that you can afford both your current mortgage and the new loan payments without stretching your budget too thin.
• You are paying off higher-interest debt: Using a home equity loan or HELOC to roll high-interest debt into one payment could help you save money on interest and make your debt easier to manage.
• You’re making home improvements: Using a home equity loan or HELOC can help you pay for renovations that make your home more comfortable and may even increase its value.
• You need funds for large, one-time expenses: A home equity loan can be a good fit for major costs because you get a lump sum upfront with fixed monthly payments.
• You need flexibility for ongoing expenses: A HELOC gives you access to a revolving line of credit, so you can borrow what you need when you need it for ongoing projects or unexpected costs.

Before making decisions about your home, it helps to know what it’s worth. Use our Home Value Estimator to get an instant ballpark figure based on your property details.