How to Get a Home Equity Loan

You’ve put in the years. You’ve built up equity. Now you want to put it to work: a kitchen renovation, a large expense you’d rather not put on a credit card, or high-interest debt you’d like to consolidate at a lower rate. 

Your equity is real money, tied to a real asset. Getting access to it takes some preparation. There are requirements to meet, documents to gather, and a lender to choose. The process generally takes two to four weeks from start to finish.

The steps are manageable once you know what to expect.

What lenders look for before approving a home equity loan

Before you apply, it helps to know whether you’re likely to be approved. Lenders look at four main factors: 

• Home equity
• Credit history
• Existing debt
• Income and employment

Let's take a look at each factor in more detail.

Home equity

Home equity is the difference between your property’s current market value and what you still owe on your mortgage. Lenders typically require that you keep some equity in the home after closing on the loan. That means you can’t borrow against your entire property value.

Lenders calculate your combined loan-to-value ratio (CLTV) when deciding how much you can borrow. Most lenders cap total borrowing at 80% to 85% CLTV, though some may let you go higher. 

For example, if the lender has a CLTV limit of 80%, your mortgage balance and home equity loan balance combined can't exceed 80% of your home's value. If your house is worth $500,000 and you owe $250,000 on your mortgage, your max home equity loan would be:

$500,000 x 0.80 = $400,000

$400,000 - $250,000 = $150,000

Credit history

Lenders generally look for a credit score of at least 600, though some may require a score  in the mid-600s or higher. Higher scores ordinarily get better rates. If your score is on the lower end, you can still apply but expect a higher rate if you're approved.

Your credit score isn't the only thing lenders will look at, though. Your entire credit history will be under consideration, and recent negative events—like a bankruptcy—could derail your home equity loan.

A pattern of missed mortgage payments can also weaken an application. Lenders typically consider your overall payment history, not just the most recent months.

Existing debt and your debt-to-income ratio (DTI)

Your lender wants to know you can afford your loan payments. They use your debt-to-income ratio (DTI) to get an idea of how affordable a new loan would be.

DTI is your total monthly debt payments divided by your gross monthly income. Most lenders look for a DTI at or below 43%. Add up your mortgage, car loans, student loans, and minimum card payments, then divide by your monthly pre-tax income. Multiple by 100 to get your DTI percentage.

For example, if your monthly pre-tax income is $6,000 and your monthly debt payments add up to $2,500, your DTI would be:

$2,500 / $6,000 = 0.42

0.42 x 100 = 42%

Income and employment history

Stable income is a key factor in showing you can afford your loan—and will continue to be able to do so. Most lenders commonly look for two or more years of stable employment history. Self-employed borrowers may need additional documentation, such as profit and loss statements, to show reliable income.

How to calculate how much you could borrow

Your borrowing range isn’t a mystery. You can estimate it yourself before you talk to a lender with a home equity calculator.

Start with your home’s current market value. Subtract what you owe on your mortgage. That’s your equity. Then apply the 80% to 85% CLTV limit most lenders use.

Here’s how the math works: Say your home is worth $350,000 and you owe $200,000:

• At 80% CLTV: ($350,000 × 0.80) - $200,000 = $80,000 potentially available
• At 85% CLTV: ($350,000 × 0.85) - $200,000 = $97,500 potentially available

Depending on your lender and credit profile, you may be eligible to borrow somewhere in that range. 

One important note: The value you use for your home is likely to be an estimate based on online sources like Zillow. The lender will generally order their own formal appraisal, which may come in higher or lower. Don’t count on a specific number until that appraisal is done.

Steps to get a home equity loan

The process has nine steps. The first three are prep work you do before contacting any lender. Steps four through nine take you from document gathering to receiving your funds.

Step 1: Check and calculate your equity

Use your most recent mortgage statement to find your outstanding balance. For home value, Zillow, Redfin, or an agent’s CMA (comparative market analysis) gives you a starting estimate. This is rough; the lender orders a formal appraisal later. But it tells you whether it’s worth proceeding.

Step 2: Review your credit report

Pull your credit report from AnnualCreditReport.com, the government’s free site. Your bank or credit card company may give you free credit scores as a customer benefit. Or get a credit report and score for free from Experian or Equifax. 

Look for errors: a wrong account, an old late payment that should have dropped off, a balance that’s been paid. Dispute anything incorrect. Note your score range. If your score is below 600, you’ll want to know that before a lender pulls your credit.

Step 3: Calculate your DTI

Add up your monthly debt payments: mortgage, car, student loans, minimum card payments. Divide that total by your gross monthly income and multiply by 100 to get your DTI. 

Most lenders look for a DTI at or below 43%. If yours is higher, consider paying down some debt before applying. If you plan to use your loan to consolidate debt, your DTI may improve if consolidating reduces your monthly payments.

Step 4: Gather your documents

Start collecting these now, before you approach any lender:

• Mortgage statement (most recent)
• Pay stubs from the last 30 days
• W-2s or 1099s (last two years)
• Tax returns (last two years)
• Homeowners insurance declaration page
• Government-issued ID

Self-employed borrowers may also need profit and loss statements. Having this stack ready could speed up the application.

Step 5: Shop and compare lenders

Get quotes from at least three sources: your current mortgage lender, a credit union, and one online lender. This gives you a range to work from. 

When you compare offers, look at the APR—not just the interest rate. APR (annual percentage rate) incorporates the rate plus all loan fees. That makes it the most useful comparison tool. 

Two lenders quoting the same rate could have very different APRs depending on their fee structures. To be accurate, you must compare loans with the same terms: 15-year to 15-year, 10-year to 10-year, etc.

Home equity loans can process faster and may have lower upfront fees than a full mortgage refinance. However, expect rates to be higher. Check current home equity loan rates to get a sense of where the market is.

Step 6: Submit your application

Most lenders allow online applications. Once you apply, the lender pulls your credit—a hard inquiry that typically has a small, temporary effect on your score. If you’re shopping with multiple lenders, do it within a short window. Most scoring models typically treat multiple mortgage inquiries made within two to six weeks as a single inquiry, minimizing the credit impact. 

Many lenders allow you to prequalify for your loan first. This helps you understand how much you’ll likely be approved to borrow before you make a full application and pay for an appraisal. Once you apply, the lender has three business days to supply you with a Loan Estimate, a required disclosure showing your rate, fees, and other terms.

Step 7: Appraisal and underwriting

After you apply, the lender orders a home appraisal to confirm your home’s value. An underwriter then reviews your file: your DTI, credit, LTV, and income documentation. This process ordinarily takes one to two weeks. You may be asked for additional documents. Respond quickly; delays here are usually on the borrower’s side.

Step 8: Close the loan

Before closing, you’ll receive a Closing Disclosure. Lenders are required to provide this at least three business days before closing. Review it carefully. It lists your final rate, loan terms, monthly payment, and closing costs. Compare it to your Loan Estimate. If anything looks different, ask before you sign.

At closing, you’ll sign the loan documents. If this loan is secured by your principal dwelling, federal law gives you a three-business-day right of rescission. This means you can cancel without penalty within that window. Saturdays count as business days for this purpose. Sundays and federal holidays don't. This right does not apply to second homes or vacation homes. 

Step 9: Receive your funds

After the rescission period ends, your funds are commonly disbursed within three to five business days, though timing varies by lender. The money arrives as a lump sum. 

The full process generally takes two to four weeks from application to funding.

What to look for when comparing home equity loan lenders

Most borrowers know to compare rates. Fewer know what else to look at. Here’s the full picture.

APR, not just interest rate

The interest rate is one number. APR is the complete one. APR incorporates the rate plus all loan fees, including origination charges and points. That makes it the accurate tool for comparing total cost across lenders. However, APR comparisons only work for loans with the same term. 

No-closing-cost loans

Some lenders advertise home equity loans with no closing costs. That’s usually offset by a higher rate. Run the APR comparison to see whether the fee-free option is actually cheaper over your loan term.

Loan terms

Home equity loan terms mostly range from five to 30 years, though available terms vary by lender. A shorter term generally means higher monthly payments but less total interest paid. A longer term lowers the payment but increases total cost. Know what you’re optimizing for before you choose.

Prepayment penalties

Ask every lender directly: Is there a penalty for paying this off early? Not all lenders charge one, but some do. Penalties are also disclosed on your Loan Estimate and Closing Disclosure. 

Prequalifying vs. applying

Most lenders let you prequalify with a soft credit inquiry. This gives you a rate estimate without affecting your credit score. Use it to narrow your list to two or three lenders before you submit a full application.

A note on being pushed toward a refi

It’s a common scenario: You call about a home equity loan and the loan officer suggests a cash-out refinance instead. 

Sometimes that’s the right advice. Often it’s because refis generate higher fees for the lender. 

Before you take that path, ask them to run the APR comparison side by side. If they won’t, find another lender. Here’s the complete take on home equity loans vs. cash-out refinancing. 

How to get a home equity loan with bad credit

A lower credit score doesn’t automatically disqualify you from getting a home equity loan. It often changes the terms you’ll be offered, however.

Most lenders generally look for a score in the mid-600s. Some lenders consider borrowers with scores down to 600, particularly when equity is substantial and DTI is low. You might qualify with a lower score if you're consolidating debt and let the lender pay your creditors directly.

What could help offset a lower score:

• More equity (lower CLTV gives the lender more cushion)
• A DTI below the 43% threshold (and lower is better)
• Strong, stable income history
• A long-standing relationship with your current lender

What won’t help: applying to many lenders at once. Prequalify first, then apply only with the lenders that look most promising.

If your credit needs work, waiting may make sense. A sustained period of on-time payments could meaningfully improve your score and your rate options. There’s no guaranteed timeline, but the direction is clear.

If you’re weighing alternatives, including HELOCs, compare your options here.

Bills Action Plan

1. Pull your credit report and credit scores. Check for errors and your score range before you apply anywhere.
2. Calculate your equity: subtract your mortgage balance from your current home value estimate. Then run the 80% to 85% LTV math to get a realistic borrowing range.
3. Gather your document stack before you start lender shopping: mortgage statement, two years of tax returns, 30 days of pay stubs, and homeowners insurance declaration.

Key Terms

Home equity: The portion of your home’s value you own outright, calculated as current market value minus the outstanding mortgage balance.

Combined loan-to-value ratio (CLTV): The ratio of all loans on your property, including the new home equity loan, to your home’s market value. Most lenders cap this at 80% to 85%.

Debt-to-income ratio (DTI): Your total monthly debt payments divided by your gross monthly income. Lenders typically look for 43% or lower.

Appraisal: A professional assessment of your home’s current market value. This can be in-person, but is often a digital appraisal compiled from online sources. If you’ve done extensive home improvements, let your lender know.

Closing Disclosure: A standardized federal document listing final loan terms, monthly payments, and closing costs. Lenders are required to provide it at least three business days before closing.

Right of rescission: A federal right under the Truth in Lending Act. It allows borrowers to cancel a home equity loan within three business days of closing without penalty. Applies only to loans secured by the borrower’s principal dwelling. Does not apply to second homes, vacation homes, or investment properties. Saturdays count as business days; Sundays and federal holidays do not.