How To Get a 100% LTV Home Equity Loan or High-LTV HELOC

One popular way to access the equity you build in your home is by getting a home equity loan, which is a second mortgage that’s disbursed in a lump sum. Interest rates are typically fixed, so your payments will stay consistent over a loan term of up to 30 years.

To qualify for a home equity loan, in many cases your loan-to-value (LTV) ratio shouldn’t exceed 85%. However, it’s possible to get a high-LTV home equity loan that allows you to borrow up to 100% of your home’s value.

Can you get a high-LTV home equity loan?

The short answer is yes, you can get a high-LTV home equity loan. Your LTV ratio represents the percentage of your home’s value being financed by a first and/or second mortgage. Generally speaking, you may borrow against your home if you have built at least 15% equity.

Still, you need to meet your individual lender’s credit and income requirements, especially since your LTV ratio would be higher than the usual maximum of 85%.

Another option: A high-LTV HELOC

For those who want to borrow against their home equity but don’t want a home equity loan, a home equity line of credit (HELOC) provides a similar option with slightly different features.

With a HELOC, as with a credit card, you can draw from the credit line as needed — up to your approved credit limit — and only pay interest on the money you actually use. Unlike home equity loans, HELOC rates are usually variable, though LTV limits are often the same as those for home equity loans: 85%, meaning that you must maintain at least 15% equity.

Additionally, as with home equity loans, you can find lenders who are willing to issue high-LTV HELOCs up to 100% of the home’s value.

How does a high-LTV home equity loan work?

If your existing LTV ratio is above 85%, you can be considered a high-LTV borrower. For example, if the LTV ratio on your first mortgage is 85% and you’re looking to borrow from your available equity, the additional loan you’re applying for would be considered a high-LTV loan.

Some lenders, such as Arsenal Credit Union and Signature Federal Credit Union, offer 100% LTV home equity loans. Arsenal offers no-closing-cost loans, while Signature Federal offers closing costs savings of up to $1,000.

Still, if you’re taking out a home equity loan without paying closing costs, you may be on the hook for those costs if you pay off and close the loan within three years, or sometimes in less time. Keep in mind that home equity loan closing costs typically range from 2% to 5% of your loan amount.

How to calculate your home equity

Since your equity and LTV ratio are such important factors in whether lenders will give you a home equity loan or HELOC — and if so, for how much — it’s essential to understand what these figures truly represent and how to calculate them.

Your home equity is the difference between what your home is worth and what you owe on any mortgage loans taken out to pay for it. To calculate it, simply subtract the balances of any outstanding loans from your home’s appraised value. The number you get is your ownership stake in the home.

For example, if your home was appraised at $400,000 and your current mortgage balance is $300,000, you have $100,000 in home equity.

How to calculate your loan-to-value (LTV) ratio

A LTV ratio expresses how much of your home’s value you’re borrowing when you take out a loan.

Below is an example of an LTV calculation for a homeowner with that same $400,000 house and $300,000 loan balance.

$300,000 ÷ $400,000 = 0.75

LTV = 75%

When taking out a second mortgage, like a home equity loan or HELOC, your LTV will include both your original mortgage and the loan against your equity. This number is called the “combined loan-to-value” (CLTV) ratio.

Following our earlier example, if that same homeowner wanted to take out a $20,000 home equity loan, their CLTV would be 80%. Here’s the math:

$300,000 + $20,000 = $320,000

$320,000 ÷ $400,000 = 0.8 or 80% LTV

Advantages and risks of a high-LTV home equity loan

Pros

• Home equity loans usually have fixed interest rates. This provides the stability of a fixed monthly payment. You won’t have to worry about your payments becoming unaffordable later.
• You’ll have the flexibility to use your loan proceeds for virtually any purpose. The challenge is deciding whether it’s worth losing most or all of your available home equity to achieve your intended financial goal.
• You can borrow against your house, even as a brand-new homeowner. With lenders willing to provide up to 100% LTV home equity loans, you can access significant financing even if the ink on your closing documents is barely dry.

Cons

• Home equity loan rates are typically higher than first mortgage rates. That’s because first mortgage lenders take priority over home equity lenders when mortgage debt is repaid in a foreclosure sale. Home equity rates can go even higher if you’re looking for a 100% LTV loan.
• Your home is being used as collateral and you’ll be managing two mortgages at once. You’re taking out another mortgage on your home when you’re borrowing against your home equity. If you neglect to repay either loan, you’re putting your home at risk of foreclosure.
• Home values could drop and put you underwater on your first mortgage and home equity loan. If this happens, you’d owe more on your home than what it’s worth and have lost the equity you’ve built. Having negative equity can cause issues if you later decide to refinance or sell your home.

Home equity loan requirements

→ AN LTV RATIO UNDER 85% Your LTV ratio is a key factor in qualifying for a home equity loan. Standard guidelines might require a maximum 85% LTV ratio, but if you’re looking to borrow up to a 100% LTV home equity loan, take the time to shop around. You may be able to find the loan you need, just be prepared to pay higher interest rates.

→ A GOOD CREDIT SCORE At a minimum, you’ll likely need a 620 credit score to get a home equity loan. To access lower interest rates, you’ll typically want a score of 740 or higher–but you’ll need a 780 or higher if it’s a conventional loan. However, each lender is free to set its own requirements, and may set a higher credit minimum for high LTV loans.

→ A MAXIMUM 43% DTI RATIO However, a debt-to-income (DTI) ratio below 36% could put you in a more favorable position. Your DTI ratio is the percentage of your gross monthly income that is used to repay debt.

→ FINANCIAL DOCUMENTATION Lenders will check your assets, employment history and income to determine whether you can repay a home equity loan on top of your first mortgage and other monthly obligations.

Keep in mind there may also be a minimum borrowing amount to make underwriting the loan worth your lender’s time and effort. In many cases, that minimum might be around $10,000.

What if you don’t qualify?

If you aren’t yet eligible to borrow a high LTV home equity loan, there are a few things you can do to qualify in the future:

→ Build more equity. The more equity you have, the better your chances are of qualifying for a home equity loan. Your best bet for improving your LTV is to pay down your mortgage balance as quickly as you can. Another option is to dive into some home improvements that will bump up your home’s value.

→ Improve your credit score. Take some concrete steps to boost your credit score. Aim for at least a 670 score — that’s the minimum to maintain a “good” score rating, according to MyFICO — to help you get approved and snag a better interest rate.

→ Reduce your DTI ratio. Pay off those credit cards and shrink your auto, personal and student loan balances. Lenders want to see that you can handle extra debt without stretching yourself too thin.

Common reasons for borrowing against home equity

There are several reasons a homeowner may choose to borrow from their home equity, including:

• Buying an investment property. You could use some of your equity as a down payment to purchase an investment property, which could be used to host Airbnb guests or rent to long-term tenants, building a passive income stream.
• Consolidating high interest rate debt. Getting rid of balances on high interest credit cards or loans could be a good reason to tap your equity. The interest rate you receive on a home equity loan might be significantly lower than many other financial products.
• Covering home improvement projects. If you’ve wanted to upgrade your bathroom or kitchen, a home equity loan might make sense. Not only can home improvements potentially boost your home’s value, but they can also provide tax benefits. Generally speaking, IRS rules allow you to deduct the interest paid on mortgages used to “buy, build or improve” a home, including home equity loans, worth up to $750,000.
• Paying for higher education. As college tuition costs continue to soar, many families are looking for ways to cover those expenses outside of borrowing student loans. A home equity loan is one avenue to pursue.
• Making ends meet during retirement. Retirees often struggle with living on a fixed income. A home equity loan or HELOC can provide extra income to fill in the gaps.

If you’re thinking about leveraging your home equity to finance your dream vacation, expensive wedding or luxury car, then you probably should save more aggressively instead to make those things happen. Don’t forget that if you’re not disciplined about how you use and repay your home equity loan and you run into financial trouble, you risk losing your home to foreclosure if you fall behind on payments.

Home equity loan alternatives

Cash-out refinance

You could choose to refinance your mortgage to get the funds you need. A cash-out refinance allows you to borrow a new mortgage — for more than what’s needed to pay off your existing home loan — and take the difference between the two loans in cash.

Credit card

Because most credit cards have a variable interest rate, they can be riskier than fixed-rate loans. The good news, however, is that you only pay interest on what you borrow and can reuse that available credit once it’s repaid. Watch out for annual fees and other account-related charges, though.

Unsecured personal loan

With an unsecured personal loan, there’s no collateral to secure the loan, which means interest rates are usually higher. If you have a lower credit score, that can also drive up the rate. You can use a personal loan for any purpose, and the interest rate and monthly payment amount are typically fixed.