How Much Equity Can You Borrow From Your Home?

How Much Home Equity Can You Borrow?

In most cases, home equity lenders will allow you to finance up to 80% of your home's appraised value. This figure is calculated using the combined loan-to-value ratio (CLTV), which combines your primary mortgage balance and your home equity loan balance or HELOC limit, and then compares the sum to your home value.

Some lenders may offer higher CLTV limits, ranging from 85% of 100%. That said, these loan options may have more stringent requirements and less favorable terms.

To get an estimate of how much you can borrow, simply calculate 80% of your home's value—or another CLTV, depending on what your lender of choice offers—then subtract your current mortgage balance.

Home Equity Borrowing Formula

Example: Let's say your home is worth an estimated $500,000, and your mortgage loan has a $300,000 balance. Here's how you'll calculate how much you can borrow:

1. $500,000 x 0.8 = $400,000
2. $400,000 - $300,000 = $100,000

You will be able to borrow up to $100,000 in a second mortgage.

Learn more: How to Calculate Home Equity

Other Factors That Determine Borrowing Limits

Depending on your situation, you may or may not be able to borrow the full amount that you want to. Here are some other factors lenders consider to determine how much they're willing to lend:

• Credit score: Your credit score is a good indicator of how reliable you are as a borrower. While home equity loans, HELOCs and cash-out refinance loans typically require a score of 620 or higher to get approved, higher loan amounts may require much higher credit scores.
• Debt-to-income ratio: Your debt-to-income ratio (DTI) shows how much of your gross monthly income goes toward debt payments. The lower your DTI, the more lenders may be willing to lend to you.
• Income and employment history: Lenders will also look at your annual income, as well as how stable your job is. If you've recently switched jobs or started a business, it may be difficult to get approved at all, let alone for a higher CLTV.
• Lender limits: In addition to CLTV caps, lenders will also have dollar limits for their loans. If a lender's max is less than the amount you want to borrow, you may need to switch to a different lender.

Learn more: Should You Tap Into Your Home Equity?

How to Access More Home Equity

Regardless of the type of loan you're considering to tap home equity, here are some steps you can take to maximize the amount you can borrow:

• Improve your credit score. With Experian, you can get free access to your Experian credit report and FICO^® Score^☉. These resources can help you gauge the health of your credit profile and give you insights into steps you can take to increase your credit score.
• Pay down debts. If you have small loan or credit card balances, paying them off can help reduce your DTI. If you're paying off credit cards, though, you may need to avoid using them until after you get approved.
• Work with a different lender. As previously mentioned, some lenders have higher loan limits than others. What's more, different lenders have varying underwriting guidelines, so one may offer you more cash than another, even if they have similar loan limits.
• Request another appraisal. You'll typically need a new appraisal during the underwriting process. If it comes in lower than what you expected, you may be able to ask for a reconsideration of value. This process allows you to voice your reasoning and request a new analysis based on additional information.
• Pay down your mortgage balance. If you don't have more than 20% equity in your home, it could make sense to wait until your loan balance is lower before you consider tapping some of your home equity.

Learn more: Ways to Quickly Build Home Equity

The Bottom Line

While most lenders cap home equity borrowing at 80% of your home's value, the exact amount you can access depends on your financial profile and your lender's policies. By improving your credit, lowering your debt and shopping around, you can maximize your borrowing potential.

Take time to understand your options and prepare your finances to get the best possible outcome. Also, be sure to monitor your credit throughout the process, so you can track your progress and address potential problems as they develop.