Is it hard to qualify for a HELOC this May?

Before you apply for a HELOC this May, it's important to understand the hurdles you could face during the approval process. Getty Images

For homeowners looking to borrow money in today's high-rate environment, a home equity line of credit (HELOC) might seem like one of the few affordable options left. Credit card rates are still high, after all, and personal loan rates haven't exactly dropped either. But HELOCs? These unique home equity borrowing options offer some of the lowest rates available on borrowing products right now — and when those rates are coupled with the other benefits, like flexible borrowing terms, HELOCs become an even more compelling choice. 

But just because HELOCs tend to be more cost-effective in today's high-rate environment doesn't mean they're a guaranteed borrowing route for every homeowner. Taking out a HELOC still involves getting through the approval process and lenders are generally looking for borrowers who check a few key boxes. And, because the economic climate has shifted, HELOC lenders have become even more cautious when evaluating applications, adding a few extra layers of complexity to the process.

So, before you start planning how to use the proceeds from a HELOC, it's important to understand whether you're likely to qualify if you apply this May. Below, we'll detail what you should know before moving forward.

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Is it hard to qualify for a HELOC this May?

The short answer is: it depends. Generally speaking, most lenders look for the following factors right now when evaluating a HELOC application:

Sufficient home equity: Most lenders require that you have at least 15% to 20% equity in your home to qualify for a HELOC. This means you need to owe less than 80% to 85% of your home's current market value on your existing mortgage. But the good news is that with the average homeowner holding approximately $313,000 in equity, many applicants should easily clear this hurdle. However, those who purchased their homes recently or have refinanced and taken cash out may face challenges meeting this requirement.

Strong credit: Your credit score is also a significant factor in getting a HELOC approved. Most lenders require a minimum credit score of 620, though many prefer scores of 680 or higher. Some may even look for scores of 720 or above for the optimal rates and terms, which could save you a substantial amount of money over the life of a home equity loan. A better score can also improve your odds of loan approval. If your score falls below these thresholds, you might still qualify to take out a HELOC with some lenders. However, you'll likely face higher interest rates, lower borrowing limits and possibly shorter repayment periods.

A low debt-to-income ratio: Your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward debt payments, is another critical factor. Requirements vary by lender, with some wanting to see a DTI at or below 36% while others accept up to 43%. A few lenders may allow ratios as high as 50%, though this typically results in higher HELOC rates.

Stable income and employment: Lenders want to see proof of stable, reliable income. A stable income reassures lenders that you can repay your loan, making you a less risky borrower, and many lenders require at least two years of steady employment history to approve a HELOC application. This can be established through maintaining a long-term job, consistently freelancing with steady clients or having multiple income streams.

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How to improve your chances of a HELOC approval this May

If you're worried that you might not qualify for a HELOC, there are a few steps you can take now to improve your odds of a positive outcome:

Check your credit report and score: Before applying, pull your credit report and check your score. If you spot any errors or outdated information, dispute them. If your score is lower than you'd like, focus on making on-time payments, paying down existing debts and avoiding new credit applications.Lower your DTI ratio: Consider paying off smaller debts or consolidating high-rate debt before applying. This can help free up more of your monthly income and improve your financial picture in the eyes of a lender.Shop around: Not all lenders have the same criteria or offer the same terms. By comparing offers from banks, credit unions and online lenders, you might find one that's more flexible or more favorable to your unique situation.Consider adding a co-applicant: If your credit or income alone isn't strong enough, adding a co-applicant with good credit and income can help strengthen your application.The bottom line

Qualifying for a HELOC this May isn't necessarily hard, but it does require preparation and a solid understanding of what lenders are looking for. With the average homeowner holding more than $300,000 in home equity, many borrowers have a strong starting point. Still, factors like credit score, debt levels and income stability can make or break an application. So, if you're thinking about tapping into your home equity, take the time to review your finances, clean up your credit and don't hesitate to shop around. The right lender could make all the difference in turning that equity into a flexible, affordable borrowing tool. 

Angelica Leicht

Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.