Home equity loans and HELOC requirements in 2022

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If you’re thinking of tapping into your home’s equity soon, learn about home equity loans and HELOC requirements and how they could benefit you. (Shutterstock)

Home equity is the difference between the value of your home and the amount owed on your home mortgage. Your equity can change in two ways – when your mortgage is paid off or when the value of your home increases.

You can use your home’s equity to fund various expenses such as: B. Home renovations, medical bills and financial emergencies.

Two popular ways to access your home’s equity are with a home equity loan or a Home Equity Line of Credit (HELOC). Each option has its own pros and cons. Requirements to qualify for home equity lending vary by lender, but there are some general guidelines to follow when applying for approval.

A Refinance cash out is another way to tap into your home’s equity. Believable makes it easy Compare mortgage refinance rates from multiple lenders.

Requirements for unlocking your home equity

For the most part, the requirements for home equity loans and HELOCs are usually the same. What is required can often depend on the lender and their underwriting standards. Here’s a look at the general 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 loan Equity built up in your home minus the amount you owe, but some lenders have lower or higher credit limits.

If you haven’t built up a lot of equity yet, there might not be much point in tapping into it. Lenders typically require that you have at least 15% to 20% equity in your home to qualify for a HELOC, or home equity loan.

Debt to Income Ratio (DTI).

Lenders also consider your debt-to-income ratio when approving loan applications. The DTI ratio compares your monthly income to recurring monthly debt. The lower your DTI ratio, the less risky you look to lenders. Lenders typically look for borrowers with a DTI ratio below 43%, but often require a DTI ratio below 36%.

To calculate your debt-to-income ratio, add up your mortgage payment, outstanding loans, credit card bills, and other recurring monthly expenses. Divide that number by your monthly income and multiply by 100 to get your DTI percentage.


Lender credit requirements can vary, but you typically need a FICO score in the mid-600s to qualify for a HELOC or home equity loan.

The better 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 interest rates for all lending products.

credit history

Lenders want to reduce their risk by making sure you make your payments every month.

To do this, lenders look at your credit history. This way they can see your history of on-time payments, ongoing debt, 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 deeper into your past and determine if you’re a low-risk borrower. Your credit rating also plays a role in the interest rate you get.

Employment and Income Test

Lenders also assess your income to ensure you’re making enough money to cover the repayment. It’s also a factor in determining how much you can borrow.

To verify your income, lenders may ask you to provide documentation such as:

  • payslips
  • W-2s
  • tax returns
  • bank statements

You can Compare mortgage refinance rates all in one place with Credible.

Home Equity Loans vs. HELOC

A home equity loan is a loan backed by equity built up in your home. A home equity loan, sometimes referred to as a second mortgage, is paid to you in the form of a lump sum that you repay in installments over a fixed term, usually between five and 30 years. Credit limits are based on the difference between the current market value of your home and the balance of your mortgage.

A home equity line of credit is a line of credit backed by the equity in your home. HELOCs usually have a credit limit and work like a credit card. You may use a HELOC up to your credit limit for any spending during the HELOC’s draw period. Your lender only charges interest on the portion of your HELOC you spend during that time. After the drawing period is over, you enter the repayment period, in which you repay the balance in installments over a set number of years.


Benefits of a Home Loan

Home equity loans offer distinct advantages over other lending products:

  • fixed prices Unlike HELOCs, which typically have variable interest rates, home equity loans come with fixed interest rates. No matter what happens, your rate will not change during the repayment.
  • Predictable Payments With a fixed interest rate, your payments will not change over the life of the loan.
  • tax benefits You can subtract the interest on your loan if you use it to improve your home.
  • Lower rates Home equity loans are often offered at lower interest rates than unsecured loans because your home serves as collateral.

Benefits of a HELOC

HELOCs offer some unique benefits that make them an attractive option for homeowners:

  • Interest Options While HELOCs generally come with a variable interest rate, some lenders allow you to convert to a fixed rate option.
  • Only pay 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, with a HELOC there is no limit to how you can spend money.
  • Higher credit limit HELOCs typically offer higher credit limits than credit cards or personal loans.

If you decide that a payout refinance is a better fit for your financial goals, go for it Compare mortgage refinance rates from multiple lenders with Credible.

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