Thinking about tapping into your home’s equity? A home equity line of credit (HELOC) can be a flexible way to access funds for home improvements, debt consolidation, or other major expenses. But before you apply, it’s important to understand what lenders look for.
The Three Key HELOC Requirements
1. Credit Score: The Foundation of Your Application
Most lenders require a minimum credit score between 620 and 680 to qualify for a HELOC. However, the better your credit score, the better your terms:
- 620-679: You may qualify, but expect higher interest rates and stricter requirements
- 680-739: Good credit opens doors to more competitive rates
- 740+: Excellent credit typically unlocks the best rates and terms
Your credit score tells lenders how reliably you’ve managed debt in the past. It’s based on factors like payment history, credit utilization, length of credit history, and types of credit used.
2. Debt-to-Income Ratio (DTI): Proving You Can Handle More Debt
Your DTI ratio compares your monthly debt payments to your gross monthly income. It’s calculated by dividing your total monthly debt obligations by your monthly income before taxes.
Most HELOC lenders prefer to see:
- DTI below 43%: Standard requirement for most lenders
- DTI below 36%: Preferred range for the best rates
For example, if you earn $8,000 per month and have $2,400 in monthly debt payments (including your mortgage, car loan, and credit cards), your DTI is 30%.
Lenders use DTI to assess whether you can comfortably manage additional debt. A lower DTI signals that you have room in your budget for a HELOC payment.
The Debt Consolidation Advantage:
If you’re planning to use your HELOC to pay off high-interest debt like credit cards or personal loans, some lenders, such as Trovy, offer a debt consolidation feature that works in your favor. These lenders will factor in the debt you’re refinancing when calculating your DTI, which can help you in three ways:
- Qualify when you otherwise might not: By accounting for the debts you’ll be paying off with your HELOC, your post-HELOC DTI improves, potentially bringing you within qualifying range
- Secure a better interest rate: A lower DTI often means better rates, and eliminating high-interest debt from your ratio can move you into a more favorable rate tier
- Access a larger credit line: With an improved DTI calculation, you may qualify for a higher HELOC amount than you would with traditional underwriting
For instance, if you have $20,000 in credit card debt with $600 monthly minimum payments, and you plan to use your HELOC to pay it off, a lender with debt consolidation underwriting would remove that $600 from your DTI calculation—since those debts will be eliminated when your HELOC funds.
What counts toward DTI?
- Mortgage payments (principal, interest, taxes, insurance)
- Car loans and leases
- Student loans
- Credit card minimum payments
- Personal loans
- Child support or alimony
What doesn’t count?
- Utilities
- Insurance premiums (except mortgage insurance)
- Groceries and everyday expenses
3. Home Equity: How Much You Can Actually Borrow
Home equity is the difference between your home’s current market value and what you owe on your mortgage. Lenders want to see substantial equity before approving a HELOC.
The Standard Formula: Most lenders allow you to borrow up to 80-85% of your home’s value, minus what you owe on your mortgage. This is called the Combined Loan-to-Value (CLTV) ratio.
Here’s how it works:
- Home value: $500,000
- Mortgage balance: $300,000
- Maximum CLTV: 85%
- Maximum total debt: $425,000 ($500,000 × 85%)
- Available equity: $125,000 ($425,000 - $300,000)
Minimum equity requirements: Most lenders require at least 15-20% equity in your home. Some specialized lenders may accept less, but you’ll typically pay higher rates.
Beyond the big three, lenders also evaluate:
- Employment and Income Stability: Steady employment history and consistent income demonstrate your ability to make payments. Self-employed borrowers may need to provide additional documentation.
- Occupancy Status: Most lenders prefer that the property is your primary residence. Investment properties or second homes may face stricter requirements or higher rates.
- State-Specific Requirements: Mortgage lending rules vary by state, and some states have additional protections or requirements for home equity lending.
How Trovy’s HELOC Works
At Trovy, we’ve designed our HELOC to make accessing your home equity straightforward. Our requirements align with industry standards, but we’ve added features that make your HELOC easier to use:
- Card-Based Access: Unlike traditional HELOCs where you need to request draws, your Trovy HELOC comes with a card that lets you access funds whenever you need them.
- No Draw Requirement: Many lenders require you to take an initial draw when you open your HELOC. With Trovy, you’re not obligated to borrow anything upfront—your credit line is there when you need it.
- Debt Consolidation Feature: If you’re using your HELOC to pay off high-interest debt, Trovy factors this into your qualification. We calculate your DTI based on what your financial picture will look like after consolidation, which can help you qualify for better terms or a larger credit line than traditional underwriting would allow.
- Transparent Terms: We believe in clarity. You’ll know exactly what you qualify for, what your rate is, and how your payments work.
Preparing to Apply
Before you submit a HELOC application, take these steps:
- Check your credit score and review your credit report for accuracy
- Calculate your DTI to understand where you stand
- Estimate your home’s value using recent comparable sales in your neighborhood
- Gather documentation including pay stubs, tax returns, and mortgage statements
- Compare lenders to find the best terms for your situation
The Bottom Line
HELOC requirements, credit score, DTI, and home equity, exist to protect both you and the lender. Meeting these standards shows you’re financially positioned to handle the responsibility of a home equity line of credit.
While requirements vary by lender, most need:
- Credit score of 680+
- DTI ratio below 43%
- At least 15-20% equity in your home
Understanding these requirements before you apply helps you know whether a HELOC is right for you and what terms you can expect.
Ready to explore your HELOC options? Trovy makes it easy to access your home equity with low rates and flexible terms designed for today’s homeowners.
