How to qualify for a home equity line of credit (HELOC)

Woman in her living room researching how to qualify for a HELOC.

Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.

If you're considering borrowing against your home's equity, you may be wondering how to qualify for a home equity line of credit (HELOC).

Eligibility for a HELOC depends on the lender, but there are some general requirements that borrowers normally have to meet. Here's what you need to know about qualifying for a HELOC.

Qualifying for a HELOC: Quick facts

To qualify for a HELOC, you must have equity in your home. Depending on the lender, you may also need a good credit score, a low debt-to-income (DTI) ratio, and meet other requirements.
The amount you may be able to borrow with a HELOC typically depends on the value of your home and the amount of equity you’ve built up.
If you don't qualify for a HELOC or find it's not the right product for you, alternative financing options include a home equity loan, cash out refinance, personal loan, or credit card.

Home equity loan vs. HELOC

If you're a homeowner, you may have access to two different types of loans that you can use for home improvements, debt consolidation, or other purposes: a home equity loan or a HELOC.

Home equity loans and HELOCs use your home's equity as collateral. However, there are some key differences between the two that you should be aware of before deciding which one is right for you.

With a home equity loan, you borrow a lump sum of money and then usually make fixed monthly payments over a set time frame. The lump sum may be ideal for large projects that require significant funds, such as a home renovation.

HELOCs work differently. Instead of borrowing a lump sum, you receive a line of credit that you can draw from as needed. This may make HELOCs more flexible than home equity loans, but it also means that your monthly payments may fluctuate depending on how much you've borrowed.

Unlike home equity loans, which usually have a fixed interest rate, HELOCs typically have a variable interest rate, which may cause your monthly payments to go up and down depending on market conditions and other factors.

Both home equity loans and HELOCs have their own advantages and disadvantages, so consider your options carefully before choosing one of those products.

Requirements: Qualify for a HELOC

A HELOC may be a great way to access money when you need it, but not everyone is eligible for this type of loan. Here are common requirements to qualify for a HELOC:

Have enough home equity

To qualify for a HELOC, you must have equity in your home. Equity is the difference between how much your home is worth and what you owe on your mortgage For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

Have a good credit score

Lenders may require a good credit score when considering you for a HELOC. A higher credit score means lenders think you are less of a financial risk and may result in lower interest rates for a loan.

Maintain a low DTI ratio

One of the most common requirements to qualify for a HELOC is to maintaining a low DTI ratio.

Your DTI ratio is the amount you pay toward your debts every month, including your mortgage payment, divided by your monthly income. For example, if your monthly income is $5,000, and you pay $1,000 in monthly debt payments, your DTI ratio is 20%.

A DTI ratio above 43% may prevent you from getting a loan, although specific requirements vary from lender to lender.

Show proof of income

When you apply for a HELOC, the lender may require income verification documents, such as pay stubs or tax returns. This helps the lender determine whether you can repay the loan.

How much can you borrow with a HELOC?

The amount you may be able to borrow with a HELOC depends on various factors, including the value of your home and the amount of equity you've built up.

In general, lenders will let you borrow up to certain percentage of the value of your home minus your outstanding mortgage balance.

Say the value of your home is $500,000 and you have an existing mortgage balance of $250,000. A lender lets you borrow up to 90% of the value of your home minus your mortgage balance. In this scenario, you may qualify for a HELOC worth $200,000.

Ultimately, the HELOC amount you may be able to borrow depends on your lender's requirements. It’s also worth noting that you don't have to borrow the entire amount offered to you.

What are HELOC alternatives?

If you don't qualify for a HELOC or the product isn’t for you, there are some alternatives. While these options work differently, they may offer many of the benefits of a HELOC.

Home equity loan

A home equity loan may be a good alternative to a HELOC because it usually has a fixed interest rate and payment, so you'll likely know exactly how much you need to pay each month.

Secured loans like HELOCs and home equity loans may have a lower interest rate than unsecured loans.

Cash out refinance

A cash out refinance is a type of mortgage refinance where you take out a new loan for more than your existing mortgage. The difference between the two loan amounts is then given to you in cash.

Cash out refinances typically have a higher interest rate than other refinances.

You can use the cash out refinance calculator from Discover Home Loans to learn how much cash you may be able to get out of your home.

Personal loan

A personal loan is an unsecured loan that you can use for almost any purpose, including home improvement projects or other expenses.

Personal loans typically have fixed interest rates and terms, which means you’ll likely make the same monthly payment for the life of the loan.

Credit card

A credit card is an unsecured line of credit that you can use for almost anything you want, including consolidating debt or making large purchases. Credit cards usually have higher interest rates than other types of loans, so be sure to shop around for the best rate before applying.

Closing thoughts: How to qualify for a HELOC

A HELOC may be a great way to access the money you've built up in your home.

Qualifying for a HELOC typically requires a good credit score, a low DTI ratio, and other factors. If you don't think you'll qualify for a HELOC or are not sure if it's right for you, consider alternatives like a cash out refinance, home equity loan, or personal loan.

Whatever route you choose, make sure to do your research to understand all the costs and risks involved.

Although Discover Home Loans does not offer HELOCs, you may be eligible to borrow $35,000 to $300,000 with a home equity loan. You can review the requirements for a home equity loan to learn more.

Main: The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.