How To Get a High-LTV Home Equity Loan?

Lenders consider several factors when you apply for a home equity loan product. Your loan-to-value (LTV) ratio is among these factors and can be the deciding factor between an approval or a denial. This guide dives into the specifics of home equity loan products and why your LTV is important to lenders. You’ll also learn about LTV limits and how to boost your approval odds if yours is on the higher end.

Understanding Home Equity Loans and LTV

Home equity loans and home equity lines of credit (HELOC) let you tap into your home equity or the amount you own outright. Here are the differences between the two and why your LTV matters when you apply for either.

What is a Home Equity Loan and a HELOC?

You can use a home equity loan or HELOC to access cash from your home equity, which is calculated by subtracting your mortgage balance from the current market value of your home. Most lenders cap the loan amount at 80% or 85% of your home equity. So, if your home is worth $300,000 and you owe $175,000, you could potentially access up to $80,000 ($300,000 * .85 – $175,000).

If you choose a home equity loan, the funds are disbursed to you in a lump sum and payable in equal monthly installments. Since the interest rate is fixed, you also get predictable borrowing costs.

However, a HELOC is a revolving line of credit with a variable interest rate. It works like a credit card: You can withdraw from it, pay back and make another withdrawal up to the credit limit during what’s referred to as a draw period. Most lenders require interest-only payments during this time frame to make the balance more manageable. But the amount you’ll pay monthly fluctuates with market conditions. And unlike home equity loans, you only pay interest on the amount you borrow.

Home equity loans are ideal if you have a list of expenses you need to cover and know the exact amount. A HELOC could be a better fit for ongoing expenses, like home improvement projects, or if you want a pool of cash to pull from as needed.

What is LTV?

Loan-to-value (LTV) is a metric lenders use to assess your riskiness as a borrower. It compares your loan amount to your property’s appraised value. The higher your LTV, the riskier you are as a borrower, as this means you have a lower amount of equity in your home.

The Relationship Between HELOC and LTV

If you’re seeking a HELOC, lenders want you to have a sizable amount of home equity. Consequently, most limit your maximum LTV to 80% or 85%; the combined total of your current mortgage and the new HELOC cannot exceed this percentage.

To illustrate, if your home is valued at $350,000 and you owe $200,000 on your mortgage, your initial LTV is 57%. You may be allowed to borrow up to an 85% LTV, or $297,500, based on these figures. If you deduct your mortgage balance of $200,000 from this figure, you could potentially access up to $97,500 ($297,500 – $200,000) with a HELOC.

Calculating LTV for a HELOC

Formula for Calculating LTV

The formula lenders use to calculate your LTV is as follows:

• (Current mortgage balance / Current Appraised Home Value) * 100

Example Calculation

If you use the figures above, here’s what the formula looks like:

• ($200,000 / $350,000) = 0.57
• 0.57 * 100 = 57%

Again, to get approved for a HELOC, your LTV shouldn’t exceed 85%. So, the difference between your current LTV and this percentage is the amount you can borrow, as evidenced by the above example.

Importance of LTV in HELOC Lending

The LTV influences your borrowing power and interest rates. It also helps lenders manage risk.

How Lenders Assess Risk

A higher LTV means you have less equity in your home. This means the lender must take on a greater risk, as the risk of default is higher given that there is less wiggle room if market conditions deteriorate. But if your LTV is lower, you have a greater stake in your home, and the risk of default is much lower.

Impact on Borrowing Limits

As previously mentioned, your LTV determines how much you can borrow with a HELOC. As a refresher, the cap is typically 85%. So, if your home is worth $400,000 and the lender allows an 85% LTV, you can potentially borrow up to $340,000 ($400,000 * .85) minus what you currently owe on the mortgage.

Influence on Interest Rates

The riskier the HELOC, the higher the interest. And again, a higher LTV means less home equity and more risk the lender must assume. So, you can expect a steeper interest rate. Keep in mind that HELOCs often come with variable interest rates that fluctuate with market conditions during the draw and repayment periods.

LTV Requirements for HELOC Approval

Below is an overview of the LTV guidelines for approval.

Typical LTV Limits Set by Lenders

Most lenders cap LTV limits for HELOCS at 85%. However, you may have more wiggle room in some instances.

Exceptions and Special Cases

If you have stellar credit and a low debt-to-income ratio, you could be eligible for a HELOC with an LTV of up to 100%. Even if this seems appealing, be mindful that you could receive a higher interest rate and stricter terms if you have a higher LTV and take out a home equity loan.

Preparing for a HELOC Application

When you’re ready to apply for a HELOC, here’s how to prepare yourself for success.

Steps to Assess Your LTV

Start by computing your LTV ratio to estimate your borrowing power. Ask the lenders you’re considering about allowable maximums so you’ll know what to expect.

Documentation and Information Required

Lenders want reassurance that you can afford to repay the amount you borrow on time. So, prepare to provide proof of income that demonstrates you have a steady employment history and the means to make monthly loan payments.

More specifically, the lender will likely request recent pay stubs, tax returns, bank statements and W-2 forms. If you’re self-employed, financial statements from your business may also be required. You’ll also need to upload recent mortgage statements that show your current mortgage balance.

By gathering these documents in advance, you can help avoid hiccups in the processing of your home equity loan application. Be mindful that the lender may request additional documentation or information to make a decision. Provide what’s needed promptly to keep the lending process moving smoothly.

Strategies to Get a High-LTV Home Equity Loan

You can take the necessary steps to boost your property value or pay down the principal balance on your mortgage to better position yourself for a high-LTV home equity loan.

Increasing Property Value

The right home improvement projects or much-needed repairs can significantly increase your home’s value. Landscaping can also add to your property value. A well-maintained yard with trees, flowers and shrubs is often attractive to appraisers. High-quality exterior work, such as replacing old siding or painting, can make a difference, too.

Reducing Existing Mortgage Balance

You can also lower the balance on your first mortgage by paying extra towards the principal or paying biweekly to give yourself an extra payment each year. Or you can refinance into a mortgage with a shorter term to build equity faster. Keep in mind that this approach will also equate to steeper monthly mortgage payments, so be sure you can afford the increased amount before moving forward.

Common Misconceptions About HELOC and LTV

Myth: “Higher LTV Always Means More Funds”

Not quite. In fact, it’s typically the opposite, as a higher LTV means you have less equity in your property and are riskier to the lender.

Myth: “LTV is the Only Important Factor”

Lenders also take a look at your overall financial profile and creditworthiness to make sure you’re a good fit for funding. The condition of the property is also important.

FAQs About HELOC LTV