Skin in the Game

Skin in the game summary:

• When you have skin in the game in a financial matter, it means you're invested in the outcome or have some sort of financial stake.

• In the context of a home equity loan, skin in the game refers to the amount of equity you have available. 

• The more skin in the game you have, the easier it may be to qualify for a home equity loan.

Skin in the game definition and meaning

Skin in the game refers to your financial stake or investment. In the context of a home mortgage or home equity loan, skin in the game can come in the form of your down payment or the equity you've built. 

Key concept: Having more equity, or skin in the game, could make you more likely to qualify for a home equity loan.

Comprehensive breakdown of skin in the game

Skin in the game, in the context of home equity loans, relates to borrowers/homeowners as well as lenders. As a borrower, you have skin in the game in that you have equity in your home. That equity may be the result of your down payment, the fact that you've been paying off your mortgage, or the fact that your home has increased in value since you purchased it.

Home equity loan lenders also have skin in the game when they write loans, because they're lending out a sum of money you’ll need to repay. The more skin in the game you have—meaning, the more equity you have—the less likely you may be to default on a home equity loan. As such, the more equity you have, the easier it may be to qualify for a home equity loan.

To evaluate your skin in the game in the context of a home equity loan, lenders use a measure called combined loan-to-value ratio, or CLTV. It's calculated by taking your mortgage balance and home equity loan balance and dividing that sum by the value of your home.

Most home equity loan lenders only let you borrow up to a CLTV of 85%, though there can be exceptions. A lender with a CLTV limit of 85% wants you to have at least 15% skin in the game. 

Example of skin in the game

Say you own a home worth $500,000 and you owe $300,000 on it, leaving you with $200,000 of equity. You want to take out a $100,000 home equity loan, which brings your CLTV to 80%. If your lender has a CLTV limit of 85%, you may get approved for your loan, assuming you meet your lender's other criteria (such as having a high enough credit score). In this situation, you still have 20% skin in the game.