Important points
To qualify for a home equity loan or line of credit, you typically need at least 20% equity in your home. Some financial institutions allow 15%.
You also need a solid credit score and an acceptable debt-to-income (DTI) ratio.
Finally, lenders want you to have a stable and sufficient income and be able to make good mortgage payments.
One of the biggest benefits of homeownership is that it builds equity. Once you’ve paid off your mortgage and saved enough money, you can usually borrow through a home equity loan or home equity line of credit (HELOC). The requirements to qualify for any of these financing options in 2025 are:
What are HELOCs and home equity loans?
HELOCs and home equity loans both allow you to borrow money based on the equity you have in your home. Here’s a quick comparison between the two:
HELOC | home equity loan | |
|---|---|---|
| overview | A variable line of credit with a typical draw period of 5 to 10 years, allowing you to withdraw funds as needed. | We deliver fixed amount loans in one lump sum. |
| Fee | variable | Repaired |
| clause | Maximum 30 years (withdrawal period 10 years, repayment period 20 years) | 5-30 years |
| repayment | up to 20 years | up to 30 years |
| monthly payment | Interest only during the withdrawal period, principal and interest during the subsequent repayment period | Payment of principal and interest during the repayment period |
| advantage |
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| Disadvantages |
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2025 HELOC and Home Equity Loan Requirements
Regardless of which type of loan you choose, home equity loan requirements and HELOC requirements tend to require borrowers to:
- Minimum percentage of home equity
- High credit rating
- Low debt-to-income (DTI) ratio
- sufficient income
- Reliable payment history
Have at least 20% equity in your home
Equity is the difference between your mortgage payment and the value of your home. This determines your loan-to-value ratio, or LTV.
To find your LTV, divide your current mortgage balance by the appraised value of your home. For example, if your loan balance is $150,000 and an appraiser values your home at $450,000, dividing the balance by the appraisal gives you a LTV ratio of approximately 33 percent. This means you own 67% of your home.
When you apply this ratio to both your first mortgage and your HELOC or home equity loan, you get a composite loan-to-value (CLTV) ratio. This is the number that lenders use to determine how much capital is available to you. Most lenders require you to maintain a minimum of 20 percent equity. In other words, keep the amount the same. However, some lenders allow 15 percent.
Using the example above, let’s say you want to take out a $30,000 home equity loan. Your total balance will be $180,000 ($150,000 first mortgage + $30,000 home equity loan). This equates to a CLTV ratio of 40% ($180,000 / $450,000), which is below the lender’s 80% cap.
Why is it important?
By maintaining at least 20% equity in your home, you can protect yourself against downturns in the housing market. If your home’s value declines and you don’t have enough equity, you may end up owning more than your home is worth, making it difficult to sell. The 20% capital standard is also important for lenders. This reduces risk.
Credit score is in the mid 600s
Many lenders allow you to leverage your assets with credit scores in the 600s (680 used to be common, but the standard is now closer to 620, especially for HELOCs). However, a low score won’t get you the best rate.
Some lenders will also offer loans to people with scores below 620, but these lenders may require you to have more equity or less debt relative to your income. There is. Home equity loans and HELOCs with bad credit can have higher interest rates, limited loan amounts, and shorter repayment terms.
Why is it important?
A credit score of at least 740 will help you get the best interest rate and could potentially save you a significant amount of money over the life of your home equity loan. As your score improves, your chances of getting approved for a loan also improve.
Before applying for a home equity product, take steps to maintain or improve your credit score. This includes making timely payments on loans and credit cards, paying off as much debt as possible, and avoiding applying for new credit.
DTI ratio 43% or less
Your debt-to-income (DTI) ratio is a measure of your gross monthly income relative to your monthly debt payments, including mortgage and home equity loan payments. Qualifying DTI ratios vary by lender, but generally speaking, the lower the DTI, the better. Most mortgage lenders require a DTI ratio of 43% or less.
Why is it important?
Lowering your DTI ratio will improve your chances of qualifying for a home equity loan or HELOC. Paying off existing debt can improve your credit score and further strengthen your application.
To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income and multiply the result by 100 to get the percentage. If that percentage exceeds 43 percent (or the lender’s specific criteria), you have a few options. You can work to pay off as much debt as possible. Increase your income. Or lower the loan amount.
sufficient income
There are no set income requirements for a HELOC or home equity loan, but you do need to have enough income to meet the DTI ratio requirements for the amount you want to use. You will also need to prove that you have ongoing income.
Why is it important?
A steady income shows the lender that you can pay the loan. Additionally, the higher your income, the easier it is to lower your DTI ratio.
When applying for a loan, be prepared to provide income verification information such as W-2s and pay stubs.
What do you expect home equity interest rates to be in 2025?
Borrowing costs for home equity products fell slightly in 2024 thanks to the Federal Reserve’s lower benchmark interest rates, but HELOC borrowing costs in particular hit a yearly low, averaging 8.36% at year-end. The cost of an average $30,000 home equity loan (currently 8.41%) has also been shrinking, although not as steadily.
Bankrate analysts expect both to decline further in 2025. CFA Greg McBride, chief financial analyst at Bankrate, expects HELOCs to average 7.25% (lowest since 2022) and home equity loans to average 7.90%. That’s assuming the Fed continues to lower the benchmark federal funds rate this year.
Although these estimates are 2-3 percentage points below previous highs, HE loans and HELOCs are no longer representative of the low-cost forms of borrowing that were the norm a few years ago. “While the average HELOC interest rate will likely fall below 8% in 2025, it is still a relatively high-cost debt,” said Ted Rothman, senior industry analyst at Bankrate.
So if you’re considering a home equity product, it’s important to shop around for the best terms and think carefully about how you spend your money and how you pay it back.
How home equity loan interest rates work
Interest rates on home equity loans and HELOCs vary by lender, but their fundamental movements generally parallel interest rate trends. Many lenders tie these interest rates to the prime rate, which is influenced by the Federal Reserve’s monetary policy.
The Federal Reserve began raising interest rates in 2022 to ease inflation, and HELOC and home equity loan interest rates also began to rise, reaching 10% at one point. However, with inflation largely under control during 2024, the Fed reversed course and began lowering rates, making a total of three rate cuts. Housing asset interest rates also followed suit.
Generally, interest rates on home equity loans tend to be the same as mortgage rates, but a few percentage points higher. This is primarily because lenders consider home equity loans and HELOCs to be riskier debt. In the case of a mortgage, the lender is usually the first to receive repayment if the borrower defaults or goes bankrupt. However, with a home equity loan or HELOC, the lender is often in a second position and the only thing that gets paid back is the repayment. rear Major mortgage lenders. As a result, the lender charges a slightly higher interest rate to compensate for the risk of potential loss.
Checklist for preparing a home equity loan
1. Check your credit score. The first step in preparing your loan application is to check your credit score. It needs to be high enough to qualify for a home equity loan in the first place, and preferably high enough to get the most competitive interest rate. If not, you can take steps to improve your numbers. Efforts include disputing errors on your credit report, continuing to make on-time payments to pay off any outstanding balances, or increasing your credit limit on your card. Keep in mind that it may take several months for your score increase to take effect.
2. Calculate your debt-to-income ratio. Debt-to-income (DTI) ratio is also a very important factor and plays a key role in whether your application is approved or not. Every lender has their own specific DTI requirements. Review your debt according to your income and aim for a DTI of 43% or less. To calculate your DTI, add up all your monthly debt payments and divide by your monthly income.
3. Calculate how much capital you have. To determine your home equity, you need to know the fair market value of your home and your mortgage balance. You determine the amount you have in your home by taking the market value of the home and subtracting your loan balance. For example, if your home has a fair market value of $450,000 and your mortgage debt is $200,000, you have $250,000 in equity. Note that this number does not convert dollars to dollars into loans. The exact amount you can borrow depends on the size of your mortgage, the amount of equity your lender requires you to leave untouched, and your overall credit score.
4. Consider options from multiple financial institutions. Take the time to research loan programs from at least three financial institutions. This process will also help you assess the requirements of different applicants, compare different conditions, and better prepare your finances.
5. Submit your application. Once you’ve decided on a financial institution that seems best suited to your goals and needs, it’s time to gather your documents and fill out an application. Many lenders allow you to do so through their websites. The process is similar to applying for a mortgage, but a little simpler and faster. Many lenders now have automated appraisals and do not require a title search for home equity loans. However, it may take up to a month to receive the funds.
Frequently asked questions about HELOC and home equity loan requirements
Additional reporting by Mia Taylor
