Minimum requirements for a HELOC or home equity loan

Unlocking the potential of your home's equity can be a game changer for achieving your financial goals. However, there are requirements for home equity loans and HELOCs. Knowing where you stand in terms of your credit is important, among other factors.

Whether you want to renovate your home or pay for your education expenses, knowing the requirements for HELOCs and home equity loans plays a crucial role in your borrowing options.

What is a HELOC?

It's important to note that a home equity loan is not the same as a home equity line of credit (HELOC), though they are similar. While both allow homeowners to borrow against their home's equity, a HELOC is a revolving line of credit that works more like a credit card, while a home equity loan is a lump sum payment with a fixed interest rate and repayment term.

Like home equity loans, a benefit of a HELOC is that the funds can be used for any purpose. Unlike a mortgage, which is used to purchase a home, a home equity loan can be used to fund anything from home improvements and debt consolidation to a child's education.

What is a home equity loan?

A home equity loan, or second mortgage, allows homeowners to borrow against the value of their property for funds. To do this, you need significant equity in your home (the difference between the home’s appraised value and mortgage balance). A key advantage is lower interest rates than credit cards or personal loans since your home is collateral, reducing lender risk.

This type of loan can be an excellent option for homeowners who need access to funds and have sufficient equity in their homes. But they’ll need to qualify for it. That includes meeting the minimum credit score required.

What credit score is required for a home equity loan or HELOC?

When it comes to getting a home equity loan, the credit score requirements can vary depending on the lender. While some lenders may approve a borrower with a minimum credit score of 620, others may prefer a higher score of around 680. Having a higher credit score can offer better rates and terms, especially for HELOCs.

Higher scores mean better credit and a lower risk for lenders. Other factors like debt-to-income and the amount of equity in the home, so check your lender’s requirements before you apply.

Are HELOCs hard to get approved for?

HELOCs can be difficult to get approved for even with an acceptable credit score. Lenders often consider a number of other factors before offering a home equity loan or HELOC.

Credit history

Your credit score matters most to qualify for a home equity loan or HELOC. But your credit history matters too. Bankruptcies or foreclosures might hurt your eligibility, while a clean history can potentially lead to better loan terms and lower interest rates.

Debt-to-income ratio (DTI)

Keeping your debt-to-income ratio (DTI) in check is necessary. DTI is the percentage of your monthly income that you use to pay debts. Lenders consider it a crucial factor when assessing your creditworthiness. A healthy DTI can indicate that you’re financially stable and can take on additional debt.

Amount of equity

Lenders take into account your home equity when evaluating your loan request. Home equity is the difference between the current market value of your property and the remaining balance on your mortgage.

 You must have a certain amount of equity (typically 10% – 20%) in your home to borrow against it. In addition, the more home equity you have, the greater your borrowing potential may be.

Getting a home equity loan or HELOC with poor credit

If your credit is below the minimum credit score requirement, you may not be able to acquire a home equity loan with bad credit. However, there are ways to increase your chances of approval.

These include securing a co-signer, checking for credit report errors, and accessing free reports yearly. You can get a free copy of your credit report from AnnualCreditReport.com. If you don’t meet the minimum credit score, consider a personal loan which comes with higher interest.

If you need to increase your score to qualify for the loan or receive better terms, follow these strategies:

• Make all payments on time and for at least the minimum amount.
• Avoid taking out new loans, which will lower your average credit age and require hard credit pulls – both of which lower your score.
• Pay off some debt to lower your credit utilization.

What disqualifies you for a HELOC?

Besides a low credit score, there are a number of things that could disqualify you from getting a HELOC. While these matters won’t necessarily disqualify you depending on the exact circumstances, they can make it significantly more difficult.

• A high debt-to-income (DTI) ratio
• Limited home equity
• Recent negative credit events in your credit history
• Liens or court judgments, whether current or recent
• Inconsistent employment or other income discrepancies

The bottom line: Know the minimum credit score for a HELOC or home equity loan

It's important to note that most lenders require a minimum credit score of 620. Yet, some lenders may demand a higher credit score for a home equity line of credit or a home equity loan, usually around 680. Other factors can affect your borrowing options as well.

On a positive note, if you qualify for this loan, the interest rates for home equity loans will likely be lower than rates for something like a personal loan. Since your home acts as collateral, it’s less risky for lenders. Wherever you are on your credit journey, you can still improve your chances of getting approved.

If you have a good credit score and are considering applying for a home equity loan, you can apply with Rocket Mortgage^Ⓡ today.