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Can You Get a Home Equity Loan With a High LTV Ratio?

Homeowners gained an average of $6,400 in equity in the past year, according to the most recent data from CoreLogic’s Homeowner Equity Insights report.

One popular way to access that equity is by borrowing a home equity loan, which is an installment loan that is disbursed in a lump sum and repaid over an agreed-upon term.

But what about those who have a higher loan-to-value (LTV) ratio and want to borrow a 100% LTV home equity loan?

It’s possible to get a home equity loan while paying down your high-LTV first mortgage. You’ll just need to meet lender requirements to access your equity.

Can you get a high-LTV home equity loan?

The answer is yes. In most cases, if you have at least 5% equity built in your home, you can borrow against that equity, said John Stearns, a senior mortgage banker at American Fidelity Mortgage Services in Milwaukee. Still, you’d need to meet your lender’s credit and income requirements since your LTV ratio — calculated by dividing your loan amount by the total value of the property — would be 95%. (We’ll discuss standard qualification guidelines later.)

Any homeowner who has an LTV ratio above 80% can be considered a high-LTV borrower, Stearns said. For example, if the LTV ratio on your first mortgage is 90% and you’re looking to borrow from your available equity of 10% — even though not every lender will let you borrow the full amount — the additional loan you’re attempting to get would be considered a high-LTV loan.

If you don’t know how to calculate your available equity, subtract your outstanding mortgage balance from the market value of your home. If your home is worth $300,000 and you owe $150,000 on your mortgage, you have $150,000 in available equity.

Some lenders, such as Bank of Oklahoma, Navy Federal Credit Union and Signature Federal Credit Union, offer 100% LTV home equity loans. Bank of Oklahoma says its high-LTV home equity loans come with no closing costs, while Navy Federal and Signature Federal both offer closing costs savings. Be mindful that if you opt for a no closing cost loan, you may have to repay those costs if you pay off and close the loan in less than three years.

Home equity loan closing costs typically range from 2-5% of your loan amount.

Risks of a high-LTV home equity loan

Just as with a standard home equity loan or home equity line or credit (HELOC), you’re taking out a second mortgage on your home when you borrow a high-LTV home equity loan. This means the loan is also being secured by your home — and you’ll be repaying two mortgages at once. If you neglect to repay the home equity loan, you’re putting your home at risk of foreclosure.

Home equity loans usually have fixed interest rates that are higher than those on first mortgages because of the added risk the lender takes by providing the loan. (Rates will go even higher if you’re looking for a 100% LTV home equity loan.) First mortgage lenders take priority over home equity lenders when being repaid in a foreclosure sale.

There’s also a risk that home values could drop and put you underwater on your first mortgage and home equity loan, which means you 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 wanted to later refinance or sell your home.

The challenge for you as a borrower is deciding whether it’s worth losing all your available equity to achieve whatever goal you have for borrowing a high-LTV home equity loan in the first place.

How to qualify for a home equity loan

Your LTV ratio, as we’ve discussed, is an important factor in qualifying for a home equity loan. Standard guidelines might require a maximum LTV ratio of 80%, which can be problematic if you’re looking for a 100% LTV home equity loan. Based on the previously mentioned numbers — a $150,000 mortgage balance and $300,000 home value — your LTV ratio would be 50%.

You’ll also need a good credit score. A score of 760 or higher can give you access to the best interest rates. If you have a score below 700, you may have a harder time qualifying for a home equity loan — especially with a high LTV. A lender could make 680 the cutoff score to qualify, Stearns said.

Just as your lender had to determine whether you can afford your first mortgage, the same process applies for home equity loans. You may need a debt-to-income (DTI) ratio that is less than 43%, though a 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.

Your lender would also consider your assets, employment history and income documentation to verify whether you have the ability to repay a home equity loan on top of your mortgage and other monthly obligations.

How much equity can you borrow?

Although borrowing limits will vary by lender, you may not be able to borrow the full amount of the equity you’ve built in your home. It’s common for lenders to only let you borrow up to 85% of your available equity, though, as Stearns said, that could still make you a high-LTV borrower. Using the example above, you might expect to only be allowed to borrow 85% of $150,000, which is $127,500.

Borrowing limits slightly differ for a HELOC. You’re typically able to borrow 85% of your home’s value, minus your mortgage balance. To calculate this using our previous example, you would multiply your home value of $300,000 by 0.85 to get $255,000, and subtract your $150,000 mortgage balance from that number. The amount you might be able to borrow through a HELOC would be $105,000. It is possible to find 100% LTV HELOCs, though.

There may also be a minimum amount you can borrow to make underwriting a home equity loan worth your lender’s effort and time. In many cases, that minimum amount might be $10,000, Stearns said.

Should you borrow a home equity loan?

There are several reasons one might choose to borrow from their home equity. Here are some common uses for home equity loans:

  • 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 tenants looking for a long-term rental.
  • Consolidating non-mortgage debt: Getting rid of balances on high-interest credit cards or loans could be a good reason to borrow a home equity loan. The interest rate you receive on a home equity loan will probably be significantly lower than many other products.
  • Covering home improvement expenses: If you’ve been wanting to upgrade your bathroom or kitchen, a home equity loan might make sense. Not only can home improvements potentially increase your home’s value, but there are also tax benefits to doing so. Generally speaking, you can deduct the interest paid on mortgages, including home equity loans, worth up to $750,000.
  • Paying for higher education: As college tuition costs continue to soar, families are likely looking for ways to cover those expenses outside of tapping student loans. A home equity loan is one avenue to pursue.

If you’re thinking about using a home equity loan to finance your dream vacation, expensive wedding or luxury car, then you probably should save more aggressively instead to make those things happen.

What if you don’t qualify?

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

  • Build more equity: The more equity you have, the better your chances are for qualifying for a home equity loan.
  • Improve your credit score: A higher credit score can help you qualify and get a better interest rate.
  • Reduce your DTI ratio: Pay off those auto loan and credit card balances. Lenders want to see that you can handle extra debt without stretching yourself too thin.

Home equity loan alternatives

There are other options outside of a home equity loan that may fit your needs.

Unsecured personal loan

With an unsecured personal loan, there’s no collateral to secure the loan, which means interest rates are usually higher — though it still could be lower than what you’d get with a 100% LTV home equity loan. If you have a lower credit score, that can also drive up the rate for which you can qualify.

Still, you can use a personal loan for virtually any purpose, the interest rate is typically fixed and you’ll have a predictable monthly payment.

Credit card

Since most credit cards have a variable interest rate, they can be more risky. The good news is you only pay interest on what you borrow and can reuse that available credit once you repay it. However, you need to watch out for annual fees and other account-related charges.

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 loan — and take the difference between your old and new loans in cash.

The bottom line

While you can find a lender that will allow you to borrow a high-LTV home equity loan, take the time to fully understand the responsibilities you’re assuming as part of your decision. It costs to borrow a home equity loan, in the form of a higher interest rate, a second mortgage payment and a reduction in the equity you’ve built so far until the loan is repaid in full.

It’s also important to remember that if you fail to make your monthly payments, you could lose your home.

Be sure to shop around with multiple home equity lenders to find the best rates and terms. Your current mortgage lender might offer the product, but it’s best to do your due diligence before borrowing from the same company again.

For extra help, learn the differences between a home equity loan and HELOC.

The information in this article is accurate as of the date of publish. 

 

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