The main things banks check before approving a HELOC

Banks approve HELOCs based on three things: how much equity you have in your home, your credit score, and your income. You need equity — the difference between what your home is worth and what you still owe on your mortgage. Most lenders want you to have at least 15 to 20 percent equity, though some will go lower. Your credit score typically needs to be 650 or higher, though 700 and above gets you better interest rates. And you need to show you have steady income to repay what you borrow.

The process is straightforward: you contact a lender, they order an appraisal to find out your home's current value, they pull your credit report, and they verify your income through tax returns or pay stubs. If all three pieces check out, you get approved. The whole thing usually takes two to four weeks.

Key Takeaways

  • You must have at least 15 to 20 percent equity in your home, meaning you owe less than 80 to 85 percent of what it is worth.
  • Your credit score needs to be around 650 or higher, though scores above 700 typically get lower interest rates.
  • You need to show current income through recent tax returns, pay stubs, or bank statements that prove you can repay borrowed money.
  • The lender will order a home appraisal to confirm your home's value, which usually costs $300 to $500 and takes one to two weeks.
  • Debt-to-income ratio matters — most lenders want your total monthly debt payments to be no more than 43 to 50 percent of your gross monthly income.

How lenders calculate the equity you need

Equity is the starting point for every HELOC decision. A lender will order an appraisal of your home to find its current market value, then subtract what you still owe on your mortgage. If your home is worth $300,000 and you owe $240,000 on your mortgage, you have $60,000 in equity — that is 20 percent of the home's value.

Most lenders let you borrow up to 80 or 85 percent of your home's value, minus what you still owe. Using the example above, if the lender allows 85 percent, you could borrow against $255,000 of your home's value. Since you already owe $240,000, you could open a HELOC for up to $15,000. Some lenders are more aggressive and will go to 90 percent, but that is less common and usually requires a higher credit score.

The appraisal is the most time-consuming part of this step. You cannot move forward without it, and it typically takes one to two weeks to schedule and complete. The cost is usually $300 to $500, and in most cases you pay it upfront, though some lenders roll it into closing costs.

Credit score requirements and what happens if yours is lower

Most banks want a credit score of at least 650 to approve a HELOC. Scores between 650 and 700 will get you approved, but at a higher interest rate. Scores above 700 get you the best rates the lender offers. If your score is below 650, many large banks will decline you, though some credit unions and smaller lenders may still work with you at a significantly higher rate.

Your credit score comes from your credit report, which tracks how you have paid past debts. Late payments, high credit card balances, and collections accounts all lower your score. The lender pulls your report from one or more of the three major credit bureaus — Equifax, Experian, and TransUnion — and uses the score from that report to make their decision.

If your score is lower than you expected, you can ask the lender which bureau they pulled from and request a free copy of your report from that bureau at annualcreditreport.com. You have the right to dispute any errors on your report, and correcting them can raise your score before you reapply.

Income verification and debt-to-income ratio

Lenders need to know you can repay what you borrow. They verify income by asking for recent tax returns (usually the last two years) and recent pay stubs (usually the last 30 days). If you are self-employed, you may need to provide profit-and-loss statements or business tax returns instead. If you receive income from Social Security, pensions, or investments, bring documentation of those too.

The lender then calculates your debt-to-income ratio — the total of all your monthly debt payments divided by your gross monthly income. Most lenders want this ratio to be no higher than 43 percent, though some will go to 50 percent. Your monthly debt payments include your mortgage, car loans, student loans, credit card minimums, and the new HELOC payment the lender estimates you will make. If your ratio is too high, you will be declined, even if you have good equity and a decent credit score.

If your debt-to-income ratio is the problem, you have two options: pay down existing debts before you explore, or explore for a smaller HELOC that would result in a lower estimated payment. Some lenders will also consider income from a spouse or co-borrower if you are married or in a civil partnership.

Employment history and recent job changes

Lenders want to see that you have stable income. Most will ask about your current job and how long you have been there. If you changed jobs in the last two years, be prepared to explain the change. A promotion or move to a similar role at another company is usually fine. A career change or a gap in employment raises questions.

If you changed jobs within the last 30 days, some lenders will still approve you, but they may ask for an offer letter from your new employer or a statement from your new employer confirming your start date and salary. If you have been unemployed or had a significant gap, you may need to wait a few months of steady employment before explore.

Self-employed borrowers face stricter scrutiny. Most lenders want to see two years of tax returns showing consistent or growing income. If your income has dropped significantly year over year, the lender may decline you or offer a smaller credit line.

What happens after you are approved

Once the lender approves you, you will receive a HELOC agreement that spells out your credit limit, interest rate, and the terms of the draw period — usually 5 to 10 years, during which you can borrow and repay as you need. You will also receive closing documents similar to those you signed when you got your mortgage, including a truth-in-lending disclosure that shows your rate, fees, and payment terms.

You will need to sign these documents and return them to the lender. Some lenders require you to close in person or via a notary; others allow electronic signatures. Once everything is signed and the lender has recorded a lien against your home (which protects them if you do not repay), your HELOC is active. You can then draw money by writing a check, using a debit card, or transferring funds online, depending on what your lender offers.

Common reasons lenders decline HELOC applications

The most common reason for decline is insufficient equity. If your home has not appreciated since you bought it, or if you have a second mortgage or other liens on the property, you may not have enough equity to borrow against. The second most common reason is a credit score below 650 or a recent late payment, foreclosure, or bankruptcy.

High debt-to-income ratio is the third major reason. If you already have a lot of monthly debt payments — a large mortgage, car loans, student loans, or high credit card balances — the lender may decide you cannot safely take on more debt. Job loss, a recent career change, or a significant drop in income can also trigger a decline, especially if you are self-employed.

If you are declined, ask the lender why. They are required to give you a reason in writing. If it is a credit score issue, you can work on improving your score and reapply in a few months. If it is equity or income, those take longer to fix, but they are fixable — you can wait for your home to appreciate, pay down your mortgage, or wait for your income to stabilize.

Frequently Asked Questions

Do I need perfect credit to get a HELOC?

No. Most lenders approve HELOCs with credit scores as low as 650, though you will pay a higher interest rate than someone with a score above 700. If your score is below 650, some credit unions and smaller lenders may still work with you, but expect higher rates and possibly a smaller credit limit.

What if I just bought my home and do not have much equity yet?

You will need to wait. Most lenders want you to have owned your home for at least six months to a year before you explore for a HELOC. Even then, you need at least 15 to 20 percent equity. If you put down less than 20 percent when you bought, you may need to wait several years for your home to appreciate or for your mortgage balance to drop enough.

Can I get a HELOC if I am self-employed?

Yes, but lenders scrutinize self-employed income more carefully. You will need to provide two years of tax returns showing consistent or growing income. If your income has dropped or is irregular, you may be declined or offered a smaller credit line. Some lenders also want to see a business license or proof of business registration.

What if I have a second mortgage — does that affect my HELOC?

Yes. A second mortgage reduces the equity available for a HELOC. If you owe $240,000 on your first mortgage and $30,000 on a second mortgage, and your home is worth $300,000, you only have $30,000 in equity left to borrow against. You would need to pay off the second mortgage or have enough equity to support both.

How long does the whole process take from process to funding?

Typically two to four weeks. The appraisal usually takes one to two weeks, credit and income verification takes a few days, and closing and funding take another week. If there are complications — the appraisal comes in lower than expected, or you need to provide additional income documentation — it can stretch to six weeks or longer.