HELOC Loan to Value: Definition and Requirements

HELOC loan to value (LTV) is a ratio creditors use to evaluate how risky it is to lend to a homeowner with a mortgage. A home equity line of credit is a loan that allows qualifying borrowers with active mortgages to take out a new loan using their equity. The LTV factor is used to calculate your loan limit each time you apply for one.

The loan to value ratio can also help determine the terms and conditions of your HELOC. Creditors, like mortgage financiers and banks, use your current home value and unpaid mortgage to calculate the LVT to determine eligibility. Read on to understand more about HELOC LTVs and their requirements and how a RenoFi HELOC is different.

A Description of HELOC Loan to Value (LTV)

The LTV ratio is a measurement lenders use in mortgage underwriting to assess home equity before approving a HELOC loan. Financial institutions also use it to determine interest rates and borrowing capacity. 

If you have had numerous home equity lines of credit, creditors may also use the cumulative LTV to evaluate your limit. Banks use the loan-to-value metric to either approve or deny you a second mortgage loan. People with a high LTV get higher interest rates because lenders consider their loans more risky.

RenoFi Loans and Loan to Value (LTV)

While a traditional 90% LTV HELOC may sound like a viable option to fund a home renovation project, it often doesn’t work because the available equity isn’t enough to tackle your entire wishlist. One way to solve for that is to take into account the After Renovation Value of your home and use that to increase the available equity - this is what RenoFi loans do. 

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’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.

Calculation of HELOC Loan to Value Ratio

Knowing how to calculate the LTV is vital because it helps you understand your eligibility when applying for a HELOC. Here are essential steps for calculating a loan-to-value ratio. 

Property Appraisal

Since the calculation requires the current property value, it’s important to have an accurate appraisal of your home. If you do not know your home’s current value, get an appraiser, preferably from a mortgage company, to check your property. 

Appraisers or home surveyors consider multiple factors when assessing a home, such as location, nearby amenities, property size, and any trending apartment or home features.

If your home is old and in an out-of-the-way place, its value might be low. The appraiser will give you the current home value after comparing it to similar properties and homes around you. 

You can also find out your property’s value by entering your home address on Trulia, Zillow, or Realtor.com, sites that provide estimated values for homes in different locations.

Have Your Mortgage Balance

Another figure you need is the balance left on your mortgage. You can easily get this figure by calling your mortgage company or bank and requesting the balance. You can also find this figure on your latest mortgage statement or via your lender’s online payment portal. It’s also highly advisable to Include your home equity loans at this stage. 

Know the Amount You Want to Borrow

You might want a HELOC loan for a single purpose or for multiple reasons. Get a quote on a loan that aligns with your financial needs. Have a financial advisor guide you so you understand how much you should request.

Calculate the LTV

Once you obtain all the necessary information, that is, current home value, mortgage balance, and the loan amount you wish to get, use the following formula to calculate your HELOC loan to value ratio.

The formula for LTV: The total loan amount (how much you still owe plus how much you want to borrow) divided by your home’s appraised or assessed value, multiplied by 100. This will convert it into a percentage. 

For example, if you want to apply for a HELOC loan of $150,000, the outstanding mortgage loan is $150,000, and your property’s value after an appraisal is $600,000, then your loan to value will be:

LTV= ($150,000 + $150,000)/$600,000 *100 = 50%

Fifty percent is a favorable LTV that will help you qualify for a loan with favorable interest rates because the HELOC will not be too costly. 

You can get an LTV that is more than 100 percent, which will disqualify you from getting the loan. In the above example, assume you want a HELOC loan of $550,000, which makes your LTV= ($150,000 + $500,000/ $600,000, which is 116.7 percent. An LTV this high will automatically disqualify you from the loan because it exceeds the creditor’s maximum LTV eligibility requirement.

Know the Maximum HELOC Loan to Value Percentage 

After determining your HELOC loan-to-value percentage, research possible lending institutions with favorable loan terms. Some creditors require an 85 percent loan-to-value ratio or less to qualify for a home equity line of credit loan. A few may consider borrowers with higher LTVs, usually 90 percent at the most, because they increase interest rates to cover the risk of default.

Because the aspects that influence the HELOC loan to value ratio are property value, mortgage balance, and the loan amount you want, you can play around with your desired HELOC loan to meet the LTV ratio of a particular lending company since you can’t really do anything about your home value and the remaining mortgage balance.

Why HELOC Loan to Value Is Crucial

Lenders rely on the loan to value ratio for several reasons, including:

Assessment of Lending Risk

One of the most important reasons financial institutions, like credit unions and mortgage banks, use LTV is to evaluate the risk of the HELOC loan. Homeowners with a high LTV, typically beyond 85 or 90 percent, are a red flag, depending on creditors’ limit.

A high loan to value ratio implies that the loan amount is almost the same as the property value or way beyond. High LTVs are considered high-risk loans, while low LTVs are less risky. If you have a high LTV, creditors can disqualify your loan application and advise you accordingly to ensure you are within the appropriate borrowing limit.

Private Mortgage Insurance

LTV also helps lenders identify who should buy mortgage insurance to cover the lending risk. The insurance policy protects the lender in case of a default. Private mortgage insurance applies to homeowners with a home equity of less than 20 percent of their property’s value.

Determine Credit Limit or Borrowing Capacity

Creditors use LTV to calculate the borrowing capacity of potential borrowers, helping them calculate the maximum loan amount they can give you, depending on your equity.

Credit institutions prefer lending to people whose equity is higher than the HELOC loan. It exposes them to less risk, as the value of the home covers the loan in case of default. They use the LTV to determine if you qualify for their loan; generally, lenders do not like it if the LTV exceeds 85 percent.

Loan Terms and Rates

In addition to the above, HELOC loan to value is vital because it helps mortgage banks determine the interest rates and loan terms to offer. People with high loan to value ratios get higher interest rates than those with lower LTV.

Moreover, borrowers with an LTV exceeding 85 or 90 percent get stricter loan terms and conditions; those with lower LTV get favorable terms.

How to Improve Your HELOC Loan to Value

If you get a high HELOC loan to value rate that disqualifies you from getting a loan, you can boost your home equity to lower your LTV using several strategies, such as:

Accelerating Mortgage Payments

A high LTV implies that you might have a large mortgage balance; it is time to start paying more to reduce it. This strategy can effectively reduce your overall loan and improve your home equity.

As the equity increases and your mortgage balance reduces, you become a less risky HELOC borrower because your loan to value also decreases. Lowering your LTV ratio will make you eligible for the next HELOC loan you will apply for.

Repairing and Upgrading Your Property

Investing in home repairs and upgrades is a guaranteed way of increasing your home’s value and equity. Updating your home’s appearance, upgrading plumbing systems, installing more energy-efficient HVAC units, and updating your electrical system raises the value of your home.

Revamp your kitchen and bathroom with the latest home trends to significantly increase the value of your property. The upgrades will reduce your loan to value ratio, as the next property appraisal will have a higher value.

HELOC Requirements to Meet Beyond Loan to Value Ratio

While the loan to value ratio is a vital eligibility requirement for HELOC, it is not the only one. There are other eligibility criteria that homeowners looking for a second mortgage should meet before applying for one. Some of these are:

A Good Percentage of Home Equity

Good equity is an essential requirement for qualifying for a HELOC. It affects your loan-to-value ratio, which, as you now know, banks and credit companies use to determine your eligibility and loan limit. 

High home equity makes you a creditworthy borrower because there are fewer risks present. Plus, it lowers your LTV, allowing you to negotiate favorable loan terms with a creditor you choose.

A Good Credit Score

Another crucial eligibility requirement for a HELOC is having a good credit score to prove your creditworthiness. Minimum credit scores vary between companies; some prefer a minimum of 620, while others can have a minimum of 740.

It’s wise to build your credit score by repaying your loan on time. Some creditors can also approve a home equity line of credit for people with a score lower than 600, but these loans will likely have a much higher interest rate to cover the heightened risk.

Income Flow

A mortgage company can only offer loans to people with a stable income. A stable income generally means that you can afford your lifestyle and have enough money left to repay the second mortgage.

Creditors ask for proof of income for several months to check if you have a stable income. If you do and you have a low LTV ratio, it is easier for the lender to approve your home equity line of credit.

Debt-to-Income (DTI) Ratio

Apart from LTV, lenders also assess your debt-to-income ratio to determine if you qualify for HELOC. Creditors compare your debt against your income to understand if another loan will strain your finances and increase the possibility of defaulting. Like LTV, your DTI should also be low, preferably under 43 percent, to show you can manage to pay your loans. 

The Type of Property and Its Use 

Another eligibility requirement is the type of property you want to secure the HELOC against. A borrower with a primary residence can get an equity line of credit more easily than someone trying to get one on a second home because no one wants to lose their primary home. The thinking is that someone would likely work harder to repay the loan to avoid foreclosure on their primary home. For that reason, homeowners with primary residence get a lower LTV that can allow them to access a home equity line of credit.

Conclusion

Loan to value (LTV) is an essential factor when seeking a home equity line of credit from most mortgage banks and other creditors. It affects your loan terms and conditions, interest rates, and borrowing capacity. LTV is highly affected by your home’s equity and the balance left on your mortgage. Therefore, understanding LTV and how it works is crucial for lenders and borrowers.

If you need help securing a HELOC, our experts will walk you through the application process, help you calculate your LTV, determine your eligibility, and provide you with the necessary documents.  

If you’re looking for funding for home improvements, RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow 11x more on average, get a low monthly payment, and keep your low rate on your first mortgage. 

Contact RenoFi today for more HELOC information!