Your home is more than just a place to live—it can also be a financial resource. A Home Equity Line of Credit (HELOC) or a home equity loan allows you to borrow against the value of your home, but do you know the requirements to qualify? Understanding credit scores, debt-to-income ratios, and lender expectations can help you make informed decisions.
In this guide, we’ll cover:
- What is a HELOC?
- What is a Home Equity Loan?
- The key differences between a HELOC and a home equity loan.
- Credit score and financial requirements.
- Common reasons applicants are denied and how to improve your chances.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving credit line that allows homeowners to borrow against their home equity as needed, similar to a credit card. Unlike a traditional loan, you don’t receive a lump sum. Instead, you can withdraw funds up to a set limit during a draw period (typically 10 years), followed by a repayment period (usually 10-20 years).
Key Features of a HELOC:
- Variable interest rates that fluctuate with market conditions.
- Flexible borrowing, allowing multiple withdrawals within the draw period.
- Lower initial payments, as you may only pay interest during the draw phase.
A HELOC is ideal for homeowners who need access to funds over time, such as for home renovations, tuition, or emergency expenses.
What is a Home Equity Loan?
A Home Equity Loan, sometimes called a second mortgage, allows you to borrow a lump sum against your home equity, with fixed monthly payments over a set term (typically 5-30 years).
Key Features of a Home Equity Loan:
- Fixed interest rates, ensuring predictable payments.
- One-time lump sum disbursement.
- Best for large, planned expenses like debt consolidation or major home improvements.
Since a home equity loan has a fixed rate, it’s a good choice for borrowers who want stability in their repayment schedule.
What’s the Difference Between a HELOC and a Home Equity Loan?
While both options let homeowners access equity, they function differently. Here’s a quick comparison:
| Feature | HELOC | Home Equity Loan |
| Loan Type | Revolving line of credit | Lump sum loan |
| Interest Rate | Variable | Fixed |
| Repayment | Interest-only during draw period; principal + interest during repayment | Fixed monthly payments from the start |
| Best For | Ongoing expenses, flexibility | One-time large expenses |
| Borrowing Method | Withdraw as needed | Full amount disbursed upfront |
| Rate Fluctuation | Can change with market rates | Stays the same for loan term |
Both can be used for home renovations, debt consolidation, education, or other financial goals. However, approval depends on your financial profile. While both options let homeowners access equity, they function differently:
- HELOC: A revolving line of credit, similar to a credit card, allowing flexible withdrawals and variable interest rates.
- Home Equity Loan: A lump sum loan with a fixed interest rate and repayment term, ideal for large, one-time expenses.
Both can be used for home renovations, debt consolidation, education, or other financial goals. However, approval depends on your financial profile.
What Credit Score Do You Need for a HELOC or Home Equity Loan?
Your credit score is a key factor in determining your eligibility and the terms you receive for a HELOC or home equity loan. While requirements vary by lender, here’s a general guideline:
- Minimum 620 Credit Score: Most lenders require at least a 620 to qualify.
- 680+ Credit Score for Better Rates: A higher score can unlock lower interest rates and better loan terms.
- Below 620? Some lenders may still approve applicants with scores below 620, but expect higher interest rates, stricter terms, or the need for a co-signer.
In addition to your credit score, lenders review your credit history. If you have recent late payments, bankruptcies, or foreclosures, it could impact your approval. Before applying, check your credit report for errors and take steps to improve your score for the best possible terms.
Debt-to-Income Ratio (DTI) Requirements
Your debt-to-income (DTI) ratio is a key factor lenders use to assess your ability to repay a HELOC or home equity loan. This ratio represents the percentage of your gross monthly income that goes toward paying debts, including your mortgage, credit cards, car loans, and other obligations.
Most lenders prefer a DTI of 43% or lower, though some may allow up to 50% if you have strong credit and financial reserves. A lower DTI suggests that you have sufficient income to take on additional debt without financial strain.
Tips to Lower Your DTI Ratio:
- Pay down existing debts to reduce your monthly obligations.
- Avoid taking on new loans before applying for a HELOC or home equity loan.
- Increase your income through raises, side jobs, or additional income sources.
The more equity you have, the higher your potential borrowing limit.
Common Reasons HELOCs and Home Equity Loans Are Denied
Getting denied for a HELOC or home equity loan can be frustrating, but understanding why can help you prepare for a stronger application. Lenders assess multiple factors beyond just your credit score to determine your eligibility. Here are the most common reasons for denial:
- High Debt-to-Income (DTI) Ratio: If your monthly debt obligations take up too much of your income, lenders may see you as a higher risk. Most lenders prefer a DTI below 43%, but some may allow up to 50% with strong financials.
- Insufficient Home Equity: To qualify, you typically need at least 10%-20% equity in your home. If you haven’t built up enough equity or your home’s value has declined, you may not qualify.
- Low Credit Score or Poor Credit History: A minimum 620 credit score is required by most lenders, but a 680+ score is ideal for better terms. Late payments, foreclosures, or bankruptcies in your history can also be red flags.
- Unstable Employment or Income: Lenders look for a steady and verifiable income stream. If you’ve recently changed jobs, have fluctuating income, or are self-employed without strong documentation, approval may be difficult.
- Existing Liens or Judgments: If you have outstanding liens, unpaid taxes, or legal judgments against your property, it could impact your ability to qualify for a HELOC or home equity loan.
If you’ve been denied, don’t get discouraged—there are steps you can take to improve your financial profile and increase your chances of approval.
Improving Your Chances of Approval
If you don’t currently qualify, consider these steps:
- Check your credit report: Correct any errors and work on improving your score.
- Lower your DTI: Pay down existing debt to reduce your ratio.
- Increase home equity: Make extra mortgage payments or wait for appreciation.
- Maintain stable income: Avoid job changes before applying.
- Consider a co-signer: A creditworthy co-signer can improve your chances.
The Bottom Line
Most lenders require a minimum 620 credit score for a HELOC or home equity loan, though a 680+ score leads to better terms. Strong home equity, a low DTI ratio, and a stable financial history improve approval odds.
If you’re ready to explore your home equity options, consult a mortgage professional today to make an informed decision!