Home equity loans & HELOCs: LTV limits and max loan amounts

Family happy to find out they have favorable 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. 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.

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 may be an ideal option if you ever need to tap into your equity.

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 a specific percentage of the current value of your home. This percentage may vary between lenders. If your lender offered to let you borrow up to 85% of your home's appraised value, you may be able to take out a loan for that amount minus any outstanding mortgage debt. So, in this example, if your home is valued at $250,000 and you have no mortgage debt, you may be able to borrow just over $210,000 with a home equity loan.

The higher your LTV ratio, the harder it may be to qualify for friendlier loan terms. As a result, a high LTV home equity loan could possibly come with higher interest rates.

LEARN MORE: What is a loan-to-value ratio and how is it calculated?

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.

Lenders may assign different LTV limits to HELOCs versus home equity loans. This means that you may be able to access more or less equity with a HELOC, depending on the lender you choose. Not all lenders offer both products, so it is a good idea to compare your options when searching for the home equity financing product that will work best for you.

Working with a lender who will offer higher LTV limits may be helpful if you know you need to borrow a larger amount of money for home improvements, debt consolidation, or another purpose. Having a good credit score and a low debt-to-income ratio when you apply may help you qualify for lower interest rates.

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 or a home equity loan.

Discover Home Loans offers low fixed rates on home equity loans with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

How to get a high LTV home equity loan or HELOC

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 loan from your home equity:

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 may 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 may improve your chances of approval.

Drawbacks of a high LTV 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 loan, it may be more challenging to do so if you have taken out a high LTV loan. This is because lenders may have alternate limits that apply to refinancing.

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:

Debt-to-income ratio: 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 home equity product.
Loan Purpose: 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.

Homeowner’s Insurance: Whether or not you have homeowner’s 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.
Title Insurance: Another potential requirement is holding title insurance. This type of insurance protects the lender's interest in your property if there are any problems with the title — for example, loans in default attached to the property.

If you're interested in learning more about a loan option with a low, fixed rate, check out details and requirements for home equity loans from Discover Home Loans.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.