Home equity plays a major role in a home equity line of credit loan, or a HELOC. You need have a certain amount of home equity, to meet the requirements of a HELOC.
Your Loan-To-Value Ratio Is Key
Your loan-to-value or LTV ratio is what the lenders will use to decide whether or not you’re a good credit risk for this type of loan. To qualify, most lenders will look for at least an 80% LTV ratio. You can make a huge difference in how much credit you get by learning what your LTV ratio is before applying for a HELOC.
How Is LTV Used?
You can use your LTV for a HELOC or a home equity loan. Basically, a loan-to-value ratio determines the percentage of how much is owed on your present mortgage. You can calculate your LTV by dividing the amount of debt by the appraised home value such as:
$140,000 balance owed รท $200,000 home value = .70 (or 70% LTV).
Since most lenders adhere to an 80% standard for HELOC, you need make sure your LTV matches this percentage or is less than it. This will help you qualify for a line-of-credit, for as much as 10% of the equity in your home.
Second Mortgage LTV
Do you already possess a HELOC or a home equity loan? This is considered a second mortgage loan. When you include this home loan into your LTV, the formula looks like this:
Combined loans (or credit limit) balances divided by appraised value.
No matter if your second mortgage gets refinanced or not, your LTV ratio is determined by the present balances on the loans. If you’re consolidating loans, inform your lender because this takes longer.
How To Improve Your LTV
If your loan-to-value ratio is currently above 80%, you can lower it by paying slightly more on your mortgage principal. If you consistently pay on time, it will gradually lower your debt and your LTV. A rise in your home’s market value will also make a favorable impact. A well kept home that is regularly repaired will help increase its value.
