What lenders look at
| Factor | Why it matters | Benchmark we could verify |
|---|---|---|
| Credit score | Higher scores reflect a better repayment history and qualify for lower rates | No official minimum for home equity loans. For first mortgages sold to Fannie Mae, the manual-underwriting minimum is 620 (fixed rate) and 640 (ARMs); its automated system has no set minimum |
| Equity and CLTV | All loans on the home divided by its value; more equity means less risk to the lender | Set by each lender |
| Debt-to-income (DTI) | Your monthly debts, including the new payment, divided by gross income | Fannie Mae's first-mortgage limits are 36% to 45% (manual) and 50% (automated); home equity lenders set their own |
| Income and employment | Shows you can make the extra payment | Lender rules |
Treat the Fannie Mae numbers as reference points, not home equity rules: Fannie Mae buys first mortgages, and home equity loans are usually held by the lender that makes them.
How to see where you stand
- Check your credit reports for errors and dispute anything wrong.
- Work out your equity and CLTV: (mortgage balance + new loan) ÷ home value. On a $350,000 home with a $250,000 mortgage, borrowing $30,000 gives a CLTV of $280,000 ÷ $350,000 = 80%.
- Calculate your DTI with the new payment included, using the debt-to-income calculator.
- Price the payment with the home equity loan calculator or the HELOC calculator at a realistic, higher rate.
The risks
- Your home is the collateral. If you fall behind, you could lose your home, even if your first mortgage is current.
- Higher cost. A lower score usually means a higher rate. Compare the APR and the total cost, not just the monthly payment.
- Variable rates. Most HELOCs are variable, so payments can rise.
- Frozen lines. A HELOC lender can freeze or reduce your line if your home's value falls or your finances worsen.
- Turning unsecured debt into secured debt. Using home equity to pay off credit cards lowers the rate but puts your house behind debts that couldn't take it before.
- Fees. Appraisal, application and closing costs, and possibly annual fees.
Alternatives to consider
- Improve your credit first. Paying down card balances and making every payment on time can raise your score and lower your rate later.
- Cash-out refinance, if your current rate isn't much below today's rates for your profile. Compare with the refinance calculator.
- A reverse mortgage (HECM) if you're 62 or older; see ways to get equity out without refinancing.
- An unsecured personal loan, which doesn't put your home at risk but usually costs more. Compare with the loan calculator.
- A HUD-approved housing counselor if you're struggling with mortgage payments; the CFPB's "Find a Counselor" tool lists them.
Watch for red flags
Be wary of any lender that pressures you to borrow more than you need, pushes you to sign quickly, asks you to leave blanks on forms, or promises approval regardless of credit. You have three days to cancel a HELOC after opening it by telling the lender in writing.
Sources: Fannie Mae B3-5.1-01: credit scores; Fannie Mae B3-6-02: DTI; Fannie Mae B2-1.2-02: CLTV; CFPB HELOC booklet; CFPB (housing counselors).
Every worked example on this page was checked with Calcist's own engine and an independent reference.