95 LTV HELOC: Your Home Equity Line of Credit

A 95 LTV HELOC is a home equity line of credit that lets you borrow up to 95% of your home’s value, giving you a lot of flexibility to cover big expenses like home renovations or large purchases. However, this type of HELOC can be trickier to qualify for and comes with some potential risks due to its high loan-to-value (LTV) ratio.

At RenoFi, we help homeowners understand their home renovation financing options. That’s why we’ve put together this guide to help you understand the ins and outs of 95% LTV HELOCs, including how to qualify, the pros and cons, and some smart ways to use the loan. This way, you can know what to expect and make a more informed decision about whether this financial product is right for you.

Note that although 95% LTV HELOCs do provide an increased borrowing power, it may still not be enough to cover your home renovation expenses if you’re light on equity. RenoFi offers a unique loan that allows homeowners to go over 100% LTV by leveraging the After-Renovation Value of your home. or keep reading below to learn more.

Understanding 95% LTV HELOCs

If you want to tap into your home’s equity to cover major expenses, a 95% LTV HELOC lets you borrow a significant portion of that equity ― up to 95% of its appraised value. This credit is way more than the standard HELOC limit of around 80% to 85% LTV.

Although it may not seem like much, the difference between 85% and 95% LTV can be huge. It can actually give you access to tens of thousands of extra dollars.

But here’s the thing: because you’re borrowing so much, lenders usually see it as riskier. That means you could end up paying higher interest rates. Plus, you’ll have stricter requirements, such as a high credit score and/or low debt-to-income (DTI) ratio.

In other words, before you jump in, it’s super important to take a close look at your finances and weigh the pros and cons. 

Why You Might Need a High LTV HELOC

Home Improvement Projects

Many homeowners take out high LTV HELOCs for home renovations. Having a flexible line of credit that you can easily tap into is super helpful, especially when handling a major renovation project where it’s hard to know the total cost from the start. With a much bigger credit limit, you can easily cover unexpected expenses as they pop up.

College Expenses

Budgeting for college can be tough, and for many parents, it is a big financial burden. Having access to a high LTV HELOC gives you a financial safety net with a reasonable interest rate. This way, you can confidently manage both the expected and unexpected financial demands that come with seeing your kids through college. 

Debt Consolidation

Paying off high-interest debt with a lower-interest HELOC can be a smart move. Credit cards and personal loans typically have higher interest rates because they usually aren’t backed by any collateral. On the flip side, HELOCs are backed by your home, which is why they offer lower rates and longer terms. This means you’ll be paying smaller monthly payments. 

Emergency Expenses

Life can be unpredictable, and unexpected expenses can pop up at any moment. That’s why having access to a large line of credit can be a huge relief. Whether you’re facing a medical emergency or other unexpected expenses, a high LTV HELOC can provide the funds you need quickly and efficiently.

Business Financing

If you’re a small business owner or an entrepreneur, a high LTV HELOC can be a great way to get the funds you need to grow your business. You can use the money for startup costs, buying inventory, or expanding your operations. This option gives you more flexibility than traditional business loans.

HELOCs vs Other Home Equity Products

When considering a 95% LTV HELOC, it’s helpful to know how it stacks up against other ways to use your home equity. Here’s a quick rundown:

Home Equity Loans

• Fixed Interest: Home equity loans have fixed interest rates, which means your monthly payments stay the same. This removes the guesswork from budgeting since you know exactly how much you’ll pay in interest well in advance.
• Lump Sum: You get all the money at once, making it useful for big, one-time expenses such as a major renovation.
• Less Flexibility: With a home equity loan, the repayment terms are fixed, so you don’t have the flexibility to borrow more later like you do with a HELOC.

Cash-Out Refinance

• Refinance Your Mortgage: This option replaces your current mortgage with a new, larger one, and you get the difference in cash.
• Potentially Lower Rates: You might get a lower interest rate than with a HELOC, but it also means extending the length of your mortgage.
• Higher Costs: Cash-out refinancing usually comes with higher closing costs and fees compared to a HELOC.

Personal Loans

• No Collateral Needed: Personal loans are unsecured, so you don’t have to use your home as collateral. This means less risk to your home.
• Higher Interest Rates: Because there’s no collateral, interest rates are usually higher than with a HELOC.
• Fixed Payments: Personal loans have fixed interest rates and monthly payments, so it’s easy to predict them.

How to Qualify for a 95 LTV HELOC

To qualify for a 95% LTV HELOC can be tougher than meeting the requirements for loans with lower LTV ratios. Here are the key things lenders typically check when deciding if you qualify:

Good Credit Score

Most lenders will require a credit score of 700 or higher to approve you for a 95% LTV HELOC. A strong credit score shows you can manage debt responsibly.

Stable Income and Employment

You’ll need to show proof of steady income and stable employment. This may include employment verification, tax returns, and recent pay stubs. Lenders want to see a reliable source of income to ensure you can make regular payments.

Low Debt-to-Income Ratio

A low DTI ratio is important for a high LTV HELOC. Lenders prefer a DTI ratio below 43%, as this shows that your monthly debt payments do not exceed 43% of your gross monthly income. In other words, you are more likely to handle additional debt better.

Significant Home Equity

Since a 95% LTV HELOC allows you to borrow a large portion of your home’s value, lenders will only be willing to offer such a large loan to homeowners with substantial existing equity in their homes. Typically, lenders will appraise your home to determine its current market value and your available equity.

Positive Payment History

If you have a history of paying your existing mortgage and other debts on time, it can boost your credibility with lenders. On-time loan repayments show that you are likely to make timely payments on the HELOC as well.

Comprehensive Documentation

When applying for a 95% LTV HELOC, you’ll need to gather some important documents. Here’s what you’ll typically need:

• Government-issued ID
• Proof of income (pay stubs, tax returns)
• Employment verification
• Current mortgage statement
• Homeowners insurance policy

RenoFi Loans as an Alternative

While a 95% HELOC does help homeowners get a loan to pay for a home renovation, it often isn’t enough, especially if they’re light on equity. RenoFi offers a new solution by letting you borrow against the future value of your property post-renovation, rather than borrowing against its current value. 

For example, imagine your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value.

So in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 thanks to the after renovation value of your home!

If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.

If you’re considering a home renovation and need a HELOC that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.