What is the LTV ratio for a home equity loan or HELOC?

You've probably heard that buying a home is an investment since property often increases in value. However, you don't necessarily need to wait until you sell your home to capitalize on that investment. A home equity loan or HELOC could let you borrow against your home's value to reach financial goals you have now—no sale required.

It's not an endless pool of money, of course. There's a limit on what you can borrow with a HELOC or home equity loan. The amount you qualify for depends on several factors. 

Your home equity loan or HELOC borrowing limit is usually based on a percentage of your home's value. Lenders generally allow you to borrow up to 80% to 90% of your home's value, minus what you still owe on the mortgage. Other factors that could affect your borrowing limit include your credit, income, and the lender's specific rules.

Ready to learn more? Let's break it down.

How much can I borrow with a HELOC or home equity loan? 

All lenders have a maximum HELOC or home equity loan size. To find out how much of that they'll lend you, lenders use a specific formula: the combined loan-to-value (CLTV) ratio. The CLTV compares your home's market value with the total amount of loans secured by it.

Typically, lenders have a maximum CLTV of 80% to 90%—including the new HELOC or home equity loan you want. So, to figure out the largest amount you could qualify for, multiply the lender's CLTV cap by your home's value, then subtract your mortgage.

For example, say your home is worth $500,000, and your mortgage balance is $300,000. The lender has a max CLTV of 85%. The numbers would look like this:

• $500,000 x 0.85 = $425,000

• $425,000 - $300,000 = $125,000

In this example, you'd have a potential maximum HELOC or home equity loan of $125,000. Your available borrowing amount depends partly on your home equity LTV and the lender’s maximum CLTV limits. That's also assuming you meet all the lender's other requirements. Here's more on that.

What factors affect your borrowing limit?

Three of the biggest factors in your HELOC or home equity loan borrowing limit are:

• Your home's value (determined via appraisal)

• How much you owe on your mortgage

• The lender's preferred LTV ratio for home equity loans and HELOCs

Lenders then consider your other qualifications when deciding how much to let you borrow. For example:

• Your credit history. You don't need excellent credit to get a HELOC or home equity loan, but at least fair credit is typically the minimum lenders look for.

• Your income. Lenders will check that you have a steady income sufficient to cover your existing debts and the new loan. 

• Your existing debts. Part of determining whether the new loan is affordable is looking at how much you spend on existing debts each month. An ideal debt-to-income ratio (DTI) is below 36%, but anything below 43% could still be acceptable.

Home equity loans and HELOCs are secured by your home, meaning you could lose your home if you don’t repay the loan. This increases your risk but decreases the lender's risk, so they may be a bit more forgiving on factors like your credit score.

How lenders calculate your limit (step-by-step)

Each lender will use its own process, but here's the general breakdown:

• Determine your home's current market value.

• Multiply by the lender's max CLTV percentage.

• Subtract the current mortgage balance.

• Adjust for credit and income factors, as well as the lender's loan limits.

Let's look at this in action. Consider Harley, a homeowner in need of a HELOC. Here's how Harley's maximum HELOC calculation might look:

• Harley's house is appraised at $250,000.

• The lender has a max CLTV of 90%, so $250,000 x 0.9 = $225,000.

• Harley's mortgage balance is $150,000. $225,000 - $150,000 = $75,000.

• Harley has good credit and no other debt, so the lender offers the full $75,000 HELOC maximum.

Why your amount may be lower than the maximum

You might qualify for the lender's max HELOC size—or you might get less (or nothing). Here's why you might receive a lower-than-max offer:

• Your DTI is too high. Lenders won't give you more money if they don't think you can afford the debt you already have.

• You don't have enough equity. If your home's value is too low (or your mortgage balance is too high), the CLTV ratio could be too high for the top HELOC or home equity loan size.

• Your credit history has some bumps. You don't need perfect credit, but a higher credit score could help you maximize your borrowing potential.

How to estimate your amount before applying

You could estimate your HELOC or home equity loan borrowing limits in a few ways:

• Crunch the numbers yourself. Multiply your home's value by 85%, then subtract your mortgage.

• Use an online calculator. Input your information into a tool like a HELOC calculator and let it do the math.

• Prequalify with a lender. Prequalification typically uses a soft credit pull to give you an estimate of the terms you might qualify for when you apply. However, before going through the prequalification process, specifically ask the lender whether it will conduct a soft or hard credit check. Soft credit checks don't affect your credit score, but a hard credit check may ding your score a bit. 

It's a good idea to get prequalified quotes from a few lenders to compare your options before you choose a loan. Start by getting a no-obligation quote through Achieve Loans.