Tapping into home equity? Here’s how to qualify for a larger loan
Taking out a real estate loan isn’t just a question of whether or not you qualify for financing in general. What also matters is the amount of money you can access.
Depending on factors ranging from your current income to your credit score to your geographic location, your potential loan value can vary significantly. That said, your eligibility isn’t set in stone. Different types of loans from different providers can affect your loan amount. And there are ways you can improve your personal finances to qualify for more cash.
For starters, when taking out a mortgage, the loan value differs depending on whether you’re taking out a conforming loan or a jumbo loan. A conforming loan follows limits set by the Federal Housing Finance Agency (FHFA).
For 2022, that limit starts at $647,200. More expensive areas of the country have higher limits. A jumbo loan, i.e., a non-conforming loan, falls above these FHFA limits. Lenders that offer jumbo loans tend to do so at higher interest rates and with stricter qualification requirements, as there tends to be more risk.
Suppose you wanted to buy a $1 million investment property, for example, and you have $200,000 in cash. If the real estate is located in an area that has a conforming loan limit of $647,200, then you’d have a big gap in financing needed to complete the purchase. A jumbo loan, however, could give you the $800,000 you need to combine with your cash to purchase the $1 million home.
However, taking out a new mortgage via a jumbo loan isn’t the only way to qualify for more cash. Homeowners can tap into existing home equity to borrow money, and you may be able to access a higher loan amount than you realize.
What's the most amount of cash I can get from a home equity loan?
The amount of cash you can get from a home equity loan can vary depending on your personal finances and the lender’s requirements.
“The amount that you can borrow — and the interest rate you’ll pay to borrow the money — depend on your income, credit history, and the market value of your home. Many lenders prefer that you borrow no more than 80 percent of the equity in your home,” notes the Federal Trade Commission.
Suppose you have a home worth $1 million and have $500,000 left on your mortgage (meaning the other $500,000 is home equity). You could then generally borrow up to another $300,000 as a second mortgage — e.g., with a traditional home equity loan or home equity line of credit (HELOC) — so that in total your housing debt equals 80% of the home’s value.
If you took out a loan to replace your first mortgage, such as with a cash-out refinance, then you might be able to take out the full $800,000, with $500,000 of that going toward paying off your first mortgage.
However, different lenders have different loan-to-value (LTV) requirements, with some allowing you to borrow more than 80% of your home’s value. And some lenders have a maximum dollar amount that they’ll provide, aside from LTV requirements, but that also ranges widely. For example, one HELOC provider might allow you to borrow up to $400,000, while others might let you borrow more than $1 million.
What does LTV mean?
An LTV expresses the relationship between a loan amount and the value of your home. So, an 80% LTV ratio would mean that a loan equals 80% of the value of a home.
“To determine your LTV ratio, divide the loan amount by the value of the asset, and then multiply by 100 to get a percentage,” explains Experian.
While an 80% LTV is often standard, that’s not to say you can never borrow more. Some lenders allow for 85% LTVs, some do 100%, and you can even find lenders that offer more than your home’s value.
That said, the higher your LTV, the more risk you’re generally taking. With a home equity loan at an 80% LTV, you at least have some wiggle room if the value of your home declines. That way, if you need to sell your home, you might still have enough to pay back the loan in full.
Yet a loan with a 110% LTV, for example, means you’re underwater on your mortgage. That can lead to sticky situations, such as not being able to pay off your debt when selling your home.
“Underwater mortgages also have a higher chance of going into foreclosure. A foreclosure occurs when you fall too far behind on your payments and the bank seizes your home,” notes Rocket Mortgage.
How can I increase my ability to qualify for a higher loan amount?
Qualifying for a bigger mortgage or home equity loan can mean shopping around with different lenders to see what terms they offer. Other factors like your credit score and debt-to-income ratio can also influence how much lenders are willing to give you.
So, if you want to qualify for a higher loan amount, you might have to:
- Improve your credit score, e.g., by making on-time payments and decreasing the amount of money you put on your credit cards each month
- Get a raise or a side job so that your higher monthly income gives lenders more confidence in your ability to repay your debts
- Increase your home equity, such as by waiting to take out a loan until property values in your area start to rise
Keep in mind, though, that the total amount you qualify for is only one piece of the puzzle when deciding how to tap into your home equity. Factors like interest rates and repayment requirements can affect the attractiveness of a loan. If you’re struggling to pay back the home equity loan because of the terms, then you’re generally not doing yourself any favors by accessing a higher loan amount.
Is it possible to combine two or more mortgages?
If you want to qualify for a higher home loan via one lender with attractive terms, you might want to combine two or more mortgages. That’s because lenders often look at your combined LTV (CLTV). So if you take out a second mortgage, such as through a HELOC, you might not be able to qualify for much money if your first mortgage has a high LTV, as both loans would count toward your CLTV.
With some types of refinancing or home loans, however, you can combine existing mortgages by using the new debt to pay off the old ones. Instead of having, say, $400,000 in debt with one lender and $100,000 with another, you might be able to access one $500,000 loan that has better terms than your existing mortgage.
For example, a Fraction Mortgage does not require any monthly payments.* As a first-lien, home equity line of credit, you would pay off all existing mortgages using your home equity and then access leftover funds to spend as you see fit.
With no required monthly payments, products like a Fraction Mortgage could free up cash flow to cover larger ticket items.
There’s still risk in taking on a loan like this, as your home could face foreclosure if you can’t pay back the money you borrowed. Plus, you might not be comfortable with more debt hanging over your head.
But if you’re aware of the risks and want to access more money within one loan, such as to have more cash in retirement, finance home improvements or access funds to make a down payment on an investment property, then Fraction could be a great choice.
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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.