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Property prices are rising, resulting in higher home equity. And to take advantage of that equity, many homeowners are turning to loan options such as home equity loans and home equity lines of credit, or HELOCs. If you too are looking to secure a loan against your home value, but aren’t sure what is the maximum LTV for a HELOC, this guide is for you.
An advantage of homeownership (apart from the fact that buying a home secures your future) is that you can build considerable equity, and can borrow against it for paying down a mortgage, a high-interest debt like a credit card or a personal loan, or to fund an expensive home improvement project. You can unlock your home equity through a HELOC which gives you a credit line with a draw period of 10 years and a repayment period of another 10. But, how much is your house worth? Let’s find out what is the maximum LTV for a HELOC.
What is the loan-to-value ratio or LTV?
LTV ratio allows the loan lenders, financial institutions, or a credit union to evaluate the risk of lending before approving a mortgage. The higher the LTV ratio, the riskier the mortgage is for the borrower. Which translates to a higher interest rate if the mortgage is approved.
A high LTV ratio may also necessitate the borrower to acquire private mortgage insurance coverage (PMI) to mitigate the lender’s risk. This can cost you an additional 0.5% to 1% of the total loan amount as annual fees.
What is the maximum LTV for a HELOC?
Your maximum loan-to-value depends on what your home is worth. You’ll get a percentage of that worth for your mortgage.
Most lenders or loan companies have a loan-to-value limit of about 90% for home equity loans combined. This means that most banks will only offer an 80-10-10 mortgage as a maximum. So you can receive a first mortgage with an 80 percent loan to home value, a second mortgage with a 10% loan to value, and will have to agree to a 10% down payment.
Let’s do the math. Suppose your real estate is worth $100,000. This means that you can get up to $80,000 for your first mortgage and $10,000 for your second mortgage. So, the highest combined home loan amount you’ll get will be around 90% of your home’s value.
How is LTV calculated?
Lenders have a set formula for calculating your loan-to-value ratio.
LTV = Current loan balance ÷ Current appraised house value
For example, if you have a loan balance of $140,000 (the exact figure is mentioned on your monthly loan statement or online account) and your home’s appraisal value is $200,000, your loan-to-value would be:
$140,000 ÷ $200,000 = .70. This means your loan-to-value ratio would be 70%.
Can you get a high-LTV home equity loan?
Although a bit difficult, you can get a high-LTV home loan. Some lenders allow you to borrow against the equity in your home as low as 5%. That means your LTV ratio would be 95%.
In fact, for low-income borrowers with an LTV ratio of 97 percent, Fannie Mae and Freddie Mac offer good mortgage programs. These require a down payment of 3 percent and mortgage insurance until the ratio falls to 80 percent.
FHA loans, issued by the Federal Housing Administration, allow an initial LTV ratio of up to 96.5%.
If your LTV ratio is high, you’ll need to meet stringent loan requirements such as an excellent credit score, a sufficient income, a reliable payment history, solid account details, low debt-to-income ratio or DTI (lower than 43 percent), significant assets, and willingness to acquire a PMI.
The ideal way to apply for a HELOC or a home equity loan is to have at least 15 percent to 20 percent equity in your home.
The credit limit for a HELOC is up to 85% of your home’s value, minus your mortgage balance. The best way to go about this loan with a revolving credit line is to contact multiple home equity lenders to find competitive rates and terms.
What should you do if you don’t qualify?
If you aren’t eligible for a high-LTV home loan, you can take a few steps to better your chances in the future:
- Build more home equity. The higher the equity in your home, the better will be your chances of qualifying for a fixed-rate home equity loan or a variable-rate HELOC loan.
- Improve your credit score to get a better interest rate. You should aim for a minimum credit score of 700 to get easy and lucrative loan approval.
- Reduce your DTI ratio at the earliest by paying off your credit card bills, auto loans, personal loans, or student loans. Timely repayments and monthly payments will add to your creditworthiness.
Read more: Can have 2 HELOCs on same property
- Loan-to-value (LTV) ratio helps mortgage lenders determine whether they should lend money to a borrower or not. It also decides the minimum amount necessary to put in a down payment.
- The maximum LTV for a HELOC for your financial situation will depend on the equity you have in your house. The higher the appraised value of the property, the lower your LTV will be.
- A low LTV ratio will get you a quicker loan approval and lower interest rates.
- One drawback of looking just at a borrower’s LTV ratio is that it solely considers the principal mortgage and excludes any other types of debts. A combined loan-to-value (CLTV) is a better indicator of a borrower’s ability to repay a mortgage.