HELOC requirements: What to know before you apply

Written by: Taylor Medine
• •4 min read
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In a Nutshell

Home equity line of credit requirements can vary by lender, but you typically need more than 15% to 20% equity in your home, a debt-to-income ratio below 50% and a credit score above 680 to qualify.
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Selling a home you love isn’t the only way to draw cash from equity.

When you need cash, home equity lines of credit or HELOCs, are a flexible credit product that let you tap into home equity you’ve built up without refinancing or putting your home on the market. 

We’ll dig into HELOC requirements and what you need to know before borrowing.

What is a HELOC?

A home equity line of credit is a credit line that’s secured by your home. Unlike home equity loans that provide cash in a lump sum, HELOCs offer a credit limit you can borrow against, and you’re only charged interest for the amount of the credit line you use.

HELOCs make sense if you have open-ended expenses or need to borrow money on an ongoing basis. That’s because they allow you to borrow only what you need.

For example, if you’re working on a home improvement project you could draw money from a HELOC to pay for materials instead of taking out a large loan and budgeting out the cash.

What are the requirements for a HELOC?

Requirements for HELOCs can vary by lender, but here are some general requirements to consider.

Home equity

Home equity represents your ownership stake in a home and is an important factor in HELOC approval because your home equity is what you’re borrowing from. Typically, lenders require at least 15% to 20% equity in your home to take out a HELOC.

DTI ratio

Your debt-to-income (DTI) ratio shows lenders if you can afford to take on new debt based on your current debt load. You can calculate your DTI ratio by adding your total minimum monthly debt payments, dividing that sum by your monthly income and multiplying by 100.

Lenders typically look for borrowers with a DTI below 50% to qualify for a HELOC, but a lower DTI could increase your chances of approval.

Credit scores

Credit scores measure the strength of your credit profile and the likelihood that you’ll keep up with credit line payments. You may need a credit score of 680 or above to qualify for a HELOC though having stronger credit could help you qualify with a better interest rate.

Income

Your income is used to calculate your DTI and as an indicator of your general capacity to pay back the credit line. Lenders may ask for pay stubs, bank statements or other tax documents to show proof of income.

How much can you borrow with a HELOC?

The credit limit of your HELOC depends on your credit, the value of your home and how much equity you have. In general, credit limits range from 80% to 90% of your home equity, so having a large amount of equity can increase the credit line you get approved for.

What can you use a HELOC for?

There aren’t restrictions on what you can use HELOCs for but they can be most beneficial for home projects because of the tax perks. If you use funds from a HELOC to make upgrades that increase the value of your home, the interest on your HELOC may be tax deductible.

Aside from home-related projects you can use HELOCs for education costs, travel, medical bills and other major expenses.

Despite their flexibility HELOCs can be risky. If you use a HELOC for a car, the car could depreciate faster than you’re able to pay off the debt. And if you’re unable to make payments on a HELOC it could put your house at risk of foreclosure.

Advantages and disadvantages of a HELOC

Like most financial products, there are pros and cons to taking out a HELOC. Here’s what you need to know.

Advantages of a HELOC

  • Flexible withdrawals and repayments. Lenders may offer a draw period — when you can draw money from the credit line using checks or a credit card — followed by a repayment period. During repayment you may be able to spread payments over several years or you may have to pay the whole balance at once.
  • Potential for a lower annual percentage rate than a credit card. Since HELOCs are credit lines backed by your home, they may come with lower interest rates than unsecured credit cards. HELOCs may also provide a low-interest introductory period, which can offer interest savings compared to personal loans.
  • It could help your credit scores. If your HELOC and payments are reported to the credit bureaus, on-time payments could help you build credit.
  • Interest may be tax deductible. If you use the money for home improvement, you may qualify to write off interest paid on the HELOC.

Disadvantages of a HELOC

  • Your house is collateral. Your home backs the loan, which means you could lose your home if you’re unable to pay off the balance on your HELOC.
  • Interest rates could increase. Interest rates on HELOCs are usually variable and can increase. 
  • You could face a balloon payment. If the full amount charged to the credit line becomes due when the draw period ends, you could be required to make one large payment.
  • Equity stake is reduced. When you borrow from equity, the equity or ownership you have in the home is lowered. If you sell your home, you’ll pocket less profit because your HELOC will need to be paid off.

What’s next?

If you’re interested in a HELOC, the next step is reviewing requirements with individual lenders and shopping around to see what terms are available. HELOCs may come with appraisal fees and other closing costs to consider when determining the total cost of borrowing.

Taking out a home equity loan and doing a cash-out refinance are other ways to borrow from home equity. Exploring these options and comparing them to HELOCs can help you find the most affordable way to borrow.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.