Home equity loan LTV: Max loan amount and HELOC LTV limits
Please note: Discover® Home Loans offers a home equity loan product, but does not offer HELOCs.
When getting a home equity loan or home equity line of credit (HELOC), your mortgage eligibility and loan terms can depend on your loan-to-value ratio (LTV).
LTV measures how much money you're borrowing against the value of your home, and the max amount of LTV acceptable by lenders is determined through home equity loan and HELOC LTV limits.
What are home equity loans and HELOCs?
A home equity loan or a HELOC enables you to use your home's equity as collateral for a new loan. Equity is the difference between the value of your property and the amount remaining on your mortgage.
You can take out a home equity loan or HELOC to pay for larger expenses like home renovations or repairs, medical bills, or college tuition. Since lenders might allow you to borrow up to 90% of the value of your property, this can be an ideal option if you ever need to tap into your equity.
Differences between home equity loans and HELOCs
Home equity loans and HELOCs are sometimes called second mortgages. While both tap into home equity, there are key differences between the two.
A home equity loan is a lump sum of money you borrow all at once and then pay in fixed increments over a set period, much like with your existing mortgage. A HELOC, on the other hand, functions more like a credit card — you're approved for a certain amount of credit and can then draw on that credit as needed. With a HELOC, you can make minimum monthly payments or choose to pay off a larger portion of the balance each month.
The interest rate on a HELOC is usually variable, while the interest rate on a home equity loan is usually fixed. Because of this flexibility, HELOCs are often used for home repairs or unexpected expenses, while home equity loans are more commonly used for larger projects and purchases.
Requirements for home equity loans and HELOCs
If you're looking to take out a second mortgage, there are a few things you'll need to meet HELOC or home equity loan requirements.
First, your lender will want to see that you have a certain amount of equity in your home. Home equity loans and HELOCs typically require that you have at least 20-30% of the equity in your home. This equity is often expressed as LTV, which is the percentage of your home's value financed by the loan.
You'll need an LTV of 85% or less for most home equity loans and HELOCs. In other words, your loan amount should be no more than 85% of your home's value. In addition, you'll need good credit and enough income to cover your current debts and your future loan payments to qualify.
With Discover Home Loans you may be eligible for a home equity loan with a minimum credit score of 620 and an LTV of up to 90%.
What is the LTV ratio?
Put simply, the LTV ratio is a measure of how much equity you have in your home.
To calculate your LTV ratio, divide the amount of your existing loan balance by the appraised value of your home. For example, if you have a loan for $150,000 and your home is appraised at $300,000, your LTV ratio would be 50% ($150,000 ÷ $300,000).
What are HEL and HELOC LTV limits?
When you take out a home equity loan or HELOC, your lender will usually require that you maintain a certain LTV ratio. This requirement limits the amount you may be able to borrow.
Both home equity loans and HELOCs can be useful financial tools, but it's important to understand the LTV limits before applying for either one.
Home equity loan LTV limits
For home equity loans, lenders typically limit the LTV to 85%. That means you’d be able to borrow up to 85% of your home's appraised value, minus any outstanding mortgage debt. So, if your home is valued at $250,000 and assuming you have no mortgage debt, you could borrow just over $210,000 with a home equity loan.
The higher your LTV ratio, the harder it is to qualify for friendlier loan terms. As a result, a high LTV home equity loan may come with higher interest rates and other requirements like private mortgage insurance (PMI).
You can read our guide on what loan-to-value ratio means for home equity loans to learn more.
HELOC LTV limits
If you're trying to decide between a HELOC and a home equity loan, one factor to consider is the LTV limit.
HELOCs typically have higher LTV limits than home equity loans—often up to 90%. This means that you may be able to access more equity with a HELOC.
The higher LTV limit can be helpful if you need to borrow a larger amount of money, and some may exceed this limit if you have a good credit score and a low debt-to-income ratio.
However, lenders might require that you maintain 10%-20% equity in your home even after taking out a HELOC. Keep in mind that your home equity serves as collateral for the loan, so you may want to consider the risks carefully before taking out a HELOC.
How to get a high LTV home equity loan
If you're looking for a loan with a high LTV ratio, you may have trouble finding a lender since LTV ratios are used to assess risk and determine whether to approve a loan.
A high LTV ratio can indicate that the loan amount is a higher percentage of the home's value, which makes the loan risker for the lender.
Fortunately, there are a few things you can do to increase your chances of getting approved for a high LTV home equity loan:
Shop around for lenders who accept high LTV ratios
When it comes to high LTV home equity loans, not all lenders are the same. Some lenders will be more willing to accept a higher LTV ratio than others.
Have a good credit score
Your credit score is one of the factors that lenders will consider when evaluating your loan application. Having a good credit score will improve your chances of getting approved for a high LTV home equity loan.
Income and employment history
Another factor that lenders will consider when evaluating your loan application is your income and employment history — having a stable income and employment history can improve your chances of approval!
Putting up additional collateral can also help improve your chances of getting approved for a high LTV home equity loan. Collateral is something of value that can be used to secure the loan in case you default on it.
Common examples of collateral include savings accounts, stocks, bonds, and life insurance policies. Keep in mind that not all lenders will agree to accept such collateral.
Drawbacks of taking high LTV home equity loan
A high LTV home equity loan can be risky. You could end up owing more than your property is worth because of growing interest rates, or even lose your home to foreclosure if you default on payments.
Also, if you eventually need or want to refinance your home equity loan, it may be more challenging to do so if you have taken out a high LTV loan. This is because lenders may be hesitant to provide refinancing options to borrowers they perceive as high-risk.
Before taking out a high LTV loan, be sure to consider all the risks and whether they're worth it for your situation.
Other home equity loan and HELOC eligibility requirements
When considering a home equity loan or HELOC, it's important to know all the eligibility requirements.
In addition to meeting the usual lending criteria like having good credit and sufficient equity, there are other factors that can affect your ability to get a home equity loan or HELOC:
Your debt-to-income ratio (DTI) is an important factor that lenders consider when determining whether you qualify for a home equity loan or HELOC. Your DTI is calculated by dividing your monthly debt payments by your monthly gross income. Lenders typically prefer that borrowers have a DTI of 43% or less to qualify for a loan or HELOC.1
Lenders may also consider the loan's purpose when determining whether you qualify for a home equity loan or HELOC. Sometimes, lenders will only approve loans for specific purposes — home improvement projects, debt consolidation, education expenses, or medical bills, for example.
Homeowners insurance may determine whether you qualify for a home equity loan or HELOC. This type of insurance protects your home from damage or loss due to events like fire, theft, or severe weather.
Another common requirement for home equity loans and HELOCs is title insurance. This type of insurance protects the lender's interest in your property in the event that there are any problems with the title — for example, loans in default attached to the property.