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Can You Get a Home Equity Loan With a High-LTV Ratio?
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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 and repaid over a fixed term of up to 30 years.
To qualify for a home equity loan, in many cases, your loan-to-value (LTV) ratio — the percentage of your home’s value being financed by a first and/or second mortgage — 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. Generally speaking, you may borrow against the equity built in your home if you have at least 5% equity, said John Stearns, a senior mortgage banker at American Fidelity Mortgage Services in Wheaton, Ill.
Still, you need to meet your individual lender’s credit and income requirements, since your LTV ratio would be 95% (more on standard guidelines later).
How does a high-LTV home equity loan work?
If your existing LTV ratio is above 80%, you can be considered a high-LTV borrower, said Stearns. For example, if the LTV ratio on your first mortgage is 90% and you’re looking to borrow from your available 10% equity — though many lenders won’t let you borrow up to the maximum — 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 less. Keep in mind that home equity loan closing costs typically range from 2% to 5% of your loan amount.
Benefits and risks of a high-LTV home equity loan
Home equity loans usually have fixed interest rates, which give you the stability of a fixed monthly payment. You won’t have to worry about your payments increasing and becoming unaffordable.
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 equity to achieve whatever goal you have for borrowing a high-LTV home equity loan in the first place.
Home equity loan rates are typically higher than those on first mortgages, because of the added risk the lender takes by providing the loan. That’s because first mortgage lenders take priority over home equity lenders when mortgage debt is repaid in a foreclosure sale. Rates can go even higher if you’re looking for a 100% LTV home equity loan.
Your home is being used as collateral and you’ll be managing two mortgages at once. Whether it’s a high-LTV home equity loan or a standard loan, 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, which means 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 wanted to later refinance or sell your home.
How to get a home equity loan
The first step of getting a home equity loan is to calculate your available home equity. To do this, subtract your outstanding mortgage balance from your home’s value. If your home is worth $300,000, for example, and you owe $150,000 on your mortgage, you have $150,000 in available equity.
Your LTV ratio typically can’t exceed 85%. Your LTV ratio is a key factor in qualifying for a home equity loan. Standard guidelines might require a maximum 85% LTV ratio, which can be problematic if you’re looking for a 100% LTV home equity loan. Based on the above example — a $150,000 mortgage balance and $300,000 home value — your LTV ratio before taking out a home equity loan would be 50%.
You’ll need a good credit score. A lender could make 680 the cutoff score to qualify for a home equity loan, according to Stearns. A 740 score or higher may give you access to lower interest rates. You might have a harder time qualifying if your score is below 700 — especially for a high-LTV loan.
You may need a maximum 43% debt-to-income (DTI) ratio.However, 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 will also consider your assets, employment history and income documentation. Lenders check these items to determine whether you can 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. Using the example above, you might expect to only be allowed to borrow 85% of $150,000, which is $127,500.
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 $10,000, Stearns said.
Borrowing limits differ slightly for a home equity line of credit (HELOC) — you’re typically able to borrow 85% of your home’s value, minus your mortgage balance. A HELOC is another type of second mortgage, though it’s a revolving credit line rather than a lump sum. Shop around with multiple home equity lenders to find competitive 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.
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 for qualifying for a home equity loan.
- Improve your credit score. Aim for at least a 700 credit score 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 costs. 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 there are also tax benefits to doing so. Generally speaking, you can 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, families are likely looking for ways to cover those expenses outside of borrowing student loans. A home equity loan is one avenue to pursue.
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
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 the two loans in cash.
Because most credit cards have a variable interest rate, they can be riskier. 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 virtually any purpose, and the interest rate and monthly payment amount are typically fixed.