How to qualify for a home equity line of credit (HELOC)
Please note: Discover® Home Loans offers a home equity loan product, but does not offer HELOCs.
If you're considering borrowing against your home's equity, you may be wondering how to qualify for a home equity line of credit (HELOC).
Qualifications for a HELOC vary depending on the lender, but there are some general requirements that all borrowers must meet. Here's what you need to know about qualifying for a HELOC.
Qualifying for a HELOC: quick facts
- To qualify for a HELOC, you must have equity in your home and maintain a low debt-to-income (DTI) ratio. You will also need a good credit score and proof of income.
- The amount you can borrow with a HELOC depends on the value of your home and the amount of equity you have built up.
- If you don't qualify for a HELOC or think it's not the right product, there are alternatives such as a home equity loan, cash-out refinance, personal loan, or credit card.
Home equity loan vs. HELOC
If you're a homeowner, you may have access to two different types of loans that you can use for home improvements, debt consolidation, or other purposes: a home equity loan or a home equity line of credit (HELOC).
Home equity loans and HELOCs use your home's equity as collateral. However, there are some key differences between the two that you should be aware of before deciding which one is right for you.
With a home equity loan, you borrow a lump sum of money and then make fixed monthly payments over a set timeframe. The lump sum makes home equity loans ideal for large projects you need to pay off in a specific timeframe.
HELOCs work differently. Instead of borrowing a lump sum, you receive a line of credit that you can draw from as needed. This makes HELOCs more flexible than home equity loans, but it also means that your monthly payments can fluctuate depending on how much you've borrowed.
Both home equity loans and HELOCs have their own advantages and disadvantages, so it's important to weigh your options carefully before deciding which one is right for you.
Requirements: qualify for a HELOC
A HELOC can be a great way to access money when you need it, but not everyone is eligible. Here are common requirements to qualify for a HELOC.
Have enough home equity
To qualify for a HELOC, you must have equity in your home. Equity is the portion of your home you own outright, without any loan or mortgage balance remaining. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.
Have a good credit score
You will also need a good credit score to qualify for a HELOC. A higher credit score means you are less of a risk to lenders and will be more likely to qualify for a loan with favorable terms.
Maintain a low debt-to-income ratio
One of the requirements to qualify for a HELOC is to maintain a low debt-to-income (DTI) ratio.
Your DTI ratio is the amount of your monthly debts, including your mortgage payment, divided by your monthly income. Lenders typically want a DTI ratio of 43 or less, although specific requirements vary from lender to lender.1
Show proof of income
When you apply for a HELOC, the lender may require income verification. Verification might include documentation of your income, including pay stubs or tax returns. The lender can use this information to determine whether you can repay the loan.
How much can you borrow with a HELOC?
A HELOC, or home equity line of credit, is a versatile financial tool that can give you substantial borrowing power. But the amount you can borrow with a HELOC depends on a few factors, including the value of your home and the amount of equity you've built up.
In general, you can typically borrow up to 85% of the value of your home minus any outstanding mortgage balance.
For example, if the value of your home is $500,000 and you have an existing mortgage balance of $250,000, you may qualify for a HELOC worth $212,500.
However, it's important to remember that the amount you can borrow varies depending on your lender's requirements. It’s also worth noting that you don't have to borrow the entire allotted amount.
What are HELOC alternatives?
If you don't qualify for a HELOC or think the product is wrong for you, there are some alternatives. While these alternatives work differently, they still offer many of the benefits of a HELOC.
Home equity loan
A home equity loan can be a good alternative to a HELOC because it usually has a fixed interest rate and payment, so you'll know exactly how much you need to pay each month.
Additionally, home equity loans typically have shorter terms than HELOCs, so you'll be able to pay off the loan faster. And, because your home secures the loan, you may get a lower interest rate than you would on an unsecured loan.
A cash-out refinance is a type of mortgage refinancing where you take out a new loan for more than your existing mortgage. The difference between the two loan amounts is then given to you in cash. Cash-out refinances often have a higher interest rate than regular mortgage refinancing.
You can use the cash-out refinance calculator from Discover Home Loans to learn how much cash you may be able to get out of your home.
A personal loan is an unsecured loan that you can use for any purpose, including home improvement projects or other expenses.
Personal loans typically have fixed interest rates and terms, which means you will make the same monthly payment for the life of the loan. Personal loans can be a good option if you have good credit and qualify for a low-interest rate.
Credit card line of credit
A credit card is an unsecured line of credit extended to you by a credit card company. You can use this line of credit for anything you want, including consolidating debt or making large purchases. Credit card lines of credit typically have higher interest rates than other lines of credit, so be sure to shop around for the best rate before applying.