HELOC and home equity loan requirements

As you pay down your mortgage, you build up equity in your home. You can then use that equity to unlock a lower cost borrowing option in the form of a home equity loan or HELOC that can help pay for renovations, cover educational expenses or reach other financial goals. If you're considering a home equity loan, you may want to also consider a home equity line of credit (HELOC). Home equity loan requirements are similar to the requirements for a HELOC.

Unlike a home equity loan, where you're required to borrow the funds in a lump sum and payback both principal and interest on the full amount starting day one, with a HELOC you can borrow what you need as you need it. Plus with a HELOC, during the initial 10 year draw period you can choose to only pay interest on the amount you borrow or use versus the full amount. After the draw period ends, the 15 year repayment period begins – where you'll be required to pay both principal and interest. 

Not every homeowner qualifies for a HELOC or a home equity loan. Here's what you need to know about HELOC and home equity loan requirements to prepare your application.

Main HELOC and home equity loan requirements

You need three things to qualify for a HELOC or home equity loan: equity in your home, a relatively low debt-to-income ratio and a decent credit score.

Lenders look at:

• Loan-to-value (LTV) ratio: Your LTV ratio is how much you owe on your mortgage(s) compared to your home's value. To qualify for a HELOC or home equity loan, the amount you borrow against the home should not be more than 85% of the home's value.
• Debt-to-income (DTI) ratio: You can calculate your DTI ratio by dividing your monthly debt payments by your monthly income. Most lenders have a maximum DTI around 55%. Expect to provide documentation that verifies your income.
• Good credit: A credit score as low as 620 could be acceptable as long as you meet other requirements related to LTV, DTI, and property type. The higher your score, usually the better the terms of your HELOC or home equity loan. If you've frozen your credit for any reason, make sure to unfreeze it before you apply.

Other factors in HELOC and home equity loan requirements

Not all HELOCs and home equity loans are the same. They have different interest rates, terms and requirements. Part of knowing how to qualify for a HELOC or home equity loan is knowing what factors impact your application. Consider the following:

• The loan product you want to apply for: Lending limits, interest rates and repayment terms vary from one loan to the next. Make sure you have decided how much you are asking to borrow and how you'd like to pay it back.
• The purpose of your HELOC or home equity loan: Your lender will need to know if you are planning to fund a home improvement project, refinance an existing loan or something else. Be prepared to give an overview of your spending plan.
• Co-applicant information: If someone is going to be assuming the same responsibility for the loan or HELOC as you, you need information about their employment and residential status.
• Your employment history: You don't need to have a traditional W-2 job to qualify for a home equity loan or HELOC. What you do need is proof of income and usually several years of steady income. For that reason, some lenders require two years of tax returns.
• Your property value: The appraised value of your home determines the LTV ratio. If you've yet to make a lot of headway on your mortgage, now may not be the right time to apply. However, if your home's value has increased considerably since you purchased it, you may have more equity than you think, even if you haven't paid off much of the mortgage yet.

Why a HELOC can be a better choice

While HELOC documentation requirements vary across lenders, Citizens' HELOC documentation requirements are much lower than most other home loans. Traditional HELOC applications can also take an average of about 45 days to complete. A HELOC might make more sense than a home equity loan if you need flexible access to funds over time rather than a lump sum upfront. It's ideal for ongoing or variable expenses—such as home renovations, education costs, or emergency needs—because it works like a credit line you can draw from as needed.

Additionally, since you only pay interest on the amount you use during the draw period, a HELOC can be more cost effective in the short term. While HELOCs have variable interest rates compared to the fixed rates of home equity loans, the requirements for both are similar: typically, at least 15% to 20% home equity, a decent credit score and a manageable debt-to-income ratio. If you're comfortable with rate fluctuations and want borrowing flexibility, a HELOC may be the better choice.

HELOC FAQs

Still curious about HELOC requirements? Here are answers to some frequently asked questions.

• Is a HELOC the same as a home equity loan? Both a HELOC and a home equity loan borrow against the equity in your home. However, a HELOC is more like a credit card while a home equity loan is an installment loan. With a home equity loan, you borrow a lump sum, then repay it in equal monthly payments. A HELOC allows you to make interest-only payments during what's known as the "draw" period, the draw period is normally a 10-year term.
• Do HELOCs have closing costs? Some HELOCs have closing costs but not all. Some lenders will charge between 2% and 5% of the credit line; however, a HELOC with Citizens does not have closing costs nor application fees.^†
• How long does a HELOC application take? Once you have all the documents ready, you can apply for a HELOC in a matter of minutes with Citizens FastLine®. With an approved fast-tracked HELOC application, you can anticipate to close in as few as 7 days and should have access to your funds in as little as two weeks. Traditional HELOC applications usually take between two and six weeks.
• Can I use a HELOC to buy another house? You may be able to use a HELOC to buy another home, or to make a down payment on another home^†, provided you have an adequate amount of equity in your current property.

Apply for a HELOC today

Is a HELOC the right option for you? Now that you're familiar with HELOC requirements, the more prepared you are to make financial choices that will help you reach your goals. Learn more about how you can tap into your home equity with a HELOC from Citizens.

Explore HELOC from Citizens