What Lenders Look At for a HELOC
The short version
- Lenders weigh five things: credit, income, existing debt, equity and the property.
- Standards differ from lender to lender, so one "no" is not the final word.
- Having your documents ready speeds things up.
Credit history
Your credit score and report show how you have handled debt. Many lenders look for scores in the mid-600s or higher for a home equity line, and better scores generally earn better terms. Lenders also look past the score at late payments, collections, bankruptcies and how much of your available credit you are using.
Before you start, check your reports for errors. You can get them free at AnnualCreditReport.com, the site authorized by federal law.
Income and employment
Lenders want evidence that you can repay. Expect to show recent pay stubs and W-2s if you are employed, or tax returns and business records if you are self-employed. Retirement, Social Security, rental and other regular income usually count when documented.
Debt-to-income ratio
Debt-to-income, or DTI, compares your monthly debt payments with your gross monthly income. It includes your mortgage, the new payment, car loans, student loans and minimum credit card payments. Many lenders prefer a DTI at or below roughly 43%, though limits vary.
Example
Monthly debt payments including the new loan: $2,800
Gross monthly income: $7,000
DTI: $2,800 ÷ $7,000 = 40%
Equity
The more equity you keep after borrowing, the lower the lender's risk. Most set a cap on total home debt as a share of the home's value. See How Much Equity Can You Borrow? for the math.
The property
Lenders consider what kind of property it is and how you use it. A primary residence usually gets the most favorable treatment. Second homes, rentals, condos and manufactured homes may face tighter limits or may not be eligible with some lenders. Homeowners insurance is required, and flood insurance may be too.
Paperwork to have ready
- Government-issued photo ID
- Recent pay stubs and the last two years of W-2s or tax returns
- Your latest mortgage statement
- Homeowners insurance declarations page
- Statements for other debts you plan to pay off, if any
Soft and hard credit checks
An early prequalification often uses a soft inquiry, which does not affect your credit score. A full application with a lender involves a hard inquiry, which can lower your score slightly for a time. Ask a lender which kind they are running before you agree to it.
If you are turned down
A lender that declines you must tell you why, or tell you how to find out. Use that reason. A different lender may weigh things differently, or you may be able to improve the picture by paying down balances, correcting a report error or requesting a smaller amount.
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This guide is general information to help you ask better questions. It is not financial, legal or tax advice, and it is not an offer of credit. Loan terms, eligibility and costs are set by each lender and vary by state and by borrower.