How much can you borrow using a home equity loan?

Life costs a lot. Some big expenses are fun (like long-awaited kitchen and bath upgrades), and some are not so fun (like unexpected medical bills). Either way, if you’re a homeowner, you might already have access to the resources you need to cover that expense. 

How much can you borrow with a home equity loan?

Most lenders allow you to borrow up to around 80% of your home’s value (including both your primary mortgage and the home equity loan you want). There are a few other determining factors, which we’ll explain below, starting with these two:

• Every lender sets a limit on how much of your home’s value they’ll lend

• Every lender sets its own dollar limit on loans

Lender’s LTV limit

Your loan-to-value (LTV) ratio is how much you owe, compared to how much your home is worth. LTV includes your primary mortgage, if you have one, and the home equity loan you want. When both loans are added together, it’s sometimes called combined LTV or CLTV.

LTV is based on what your home is worth today, not how much you paid when you bought it. So the lender will hire a professional appraiser to find out the current market value.

It’s common for lenders to limit your LTV to 80%. Some may have higher or lower limits.

Lender’s dollar limit

The maximum loan amount is whatever the lender says is the most you can borrow. Every lender sets its own maximum loan amount.

How to calculate your maximum home equity loan amount

Find your LTV by dividing your current mortgage balance by the current value of your home.

If you owe $300,000 on a home worth $500,000, your LTV is 60%.

300,000 ÷ 500,000 = .6 (or 60%)

Your maximum home equity loan amount is the difference between how much you owe and your lender’s LTV limit. Let’s say the lender allows an 80% LTV. Eighty percent of $500,000 is $400,000, so you could potentially borrow another $100,000 with a home equity loan.

$400,000 (maximum debt allowed by the lender)

- $300,000 (amount you owe)

$100,000 (additional debt you could apply for)

Your home equity 

Equity is the opposite of LTV. The more equity you have, the more you could potentially borrow.

You might have more equity than you think you do. You gain equity in three ways: 

• Making a down payment

• Making your monthly payments

• As your home’s value rises over time

Here’s an example of how equity might grow on a $300,000 home.

If you make a $15,000 down payment on the day you buy a $300,000 home, you’re starting with $15,000 in equity or 5% and now owe $285,000. 

As you continue to pay down your mortgage, your equity increases. Let’s say you bring your mortgage balance down by $40,000 (in addition to your down payment) and the market value of your home stays the same. Now you’d have $55,000 in equity or 18%. You owe $245,000 on a home worth $300,000.

Most homes in the U.S. rise in value over time. Let’s say that while you’ve been paying down your mortgage, your home’s market value has risen to $320,000. Now you’ve got $75,000 in equity or 24%. You owe $245,000 on a home worth $320,000.

As your debt gets smaller compared to your home’s value, your equity goes up.

How to qualify for a home equity loan

Besides meeting your lender’s LTV and loan limit, a few other factors relating to your finances also affect your eligibility.

Your income

Lenders will verify your income. You may have to provide verification, such as W-2 forms and paystubs.

Your other debts

Your ability to afford new loan payments is important to lenders. They’ll measure affordability by looking at your debt-to-income ratio (DTI). DTI is how much of your monthly gross (before taxes) income you spend on debt payments and housing, including the new loan that you want.  

To calculate your DTI, the lender will consider your salary, bonuses, commissions, rental income, spousal support, or other income.

The debts that would normally be compared to your income include:

• Your current housing payment (principal and interest payment on your mortgage, plus property taxes and homeowners insurance)

• Homeowner’s association dues

• Monthly loan payments

• Credit card minimum payments

• Child or spousal support

Acceptable DTIs vary by lender, but 43% is typical. If you have a lower DTI you might be able to get a bigger loan. 

Your credit score

The lender will look at your credit score and credit history. A home equity loan is secured by an asset (your home), so the credit requirements may be more flexible compared to a credit card or an unsecured personal loan.  

If you are getting a home equity loan for debt consolidation, you might qualify with a credit score as low as 640. For other uses, you will need a higher score.

Find out if you qualify for a home equity loan from Achieve, without risk to your credit score.