Features

• A home equity loan is a loan in which a home serves as collateral for the lender, meaning that if the borrower fails to make payments on the loan, the lender can sell the home to repay the debt. Home equity loans can be used for any purpose including home improvement, debt consolidation or paying for a wedding. The home equity loan generally has a fixed interest rate and equal monthly payments for anywhere from five to 30 years, depending on the amount borrowed and the lender's policies.
  
  

Property Eligibility

• Lenders typically allow home equity loans to be taken out on single-family residences. Some lenders, such as Chase, require that homeowners reside in the home as a primary residence to be able to qualify for a home equity loan. Other lenders, such as Wells Fargo, also allow homeowners to obtain home equity loans on homes they rent to tenants.
  
  

Equity Requirements

• In general, homeowners need to have equity in a property in order for that property to be used as collateral for a home equity loan. Equity is the difference between the current market value of the property and the amount still owed on the first mortgage and any other loans for which the home is collateral. Most lenders require that the homeowner maintain at least 20 percent equity in the home, meaning the amount of the first mortgage plus the home equity loan cannot exceed 80 percent of the home's value. Some lenders may be willing to lend up to 100 percent or 125 percent of the value of a home, but at higher interest rates.
  
  

Borrower Eligibility

• Homeowners who own a home with equity that is eligible for a home equity loan still have to qualify for the loan. Qualification is based primarily on the borrower's credit score and income. The exact credit score needed to qualify for a loan varies depending on the lender and the current financial market, but someone with a better score is more likely to qualify and secure a low interest rate. The borrower's income helps the bank assess whether the homeowner is likely to be able to afford payments, and lenders generally try to keep a borrower's total monthly debt payments to under 36 percent of his total monthly income, according to Bankrate.com.
  
  

State Laws

• Some states may have additional guidelines about what types of properties are eligible for home equity loans. For example, Texas does not allow home equity loans for homeowners with less than 20 percent equity in their homes. In addition, homeowners can only have one home equity loan at a time in Texas and can refinance the loan no more than once per year.