Before the housing crisis, it wasn’t unusual to see home equity loans for as much as 100% of the home’s value. Today, though, restrictions are much tighter. You are more likely to be able to borrow up to 80% or 85% of a home’s value if you are lucky.

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What Determines How Much You Can Borrow?

How much you are able to borrow doesn’t just depend on your home’s value. A very large determinant is your credit score. The higher your score, the higher the loan-to-value ratio a lender will allow. Your credit score helps a lender determine your level of financial responsibility. A basic idea of what lenders think of each score range is as follows:

• 740 – 799 – Your scores are above average and you are likely financially responsible
• 670 – 739 – Your score is about average, but your likelihood of delinquency is still fairly low
• 580 – 669  – Your score is below average and you are more likely to default
• 579 and below – Your score is ‘poor’ and you are very likely to default

Lenders use this tier or one very similar to determine your likelihood of defaulting on your loan. The higher your score, the more likely it is that you will be able to borrow more of your equity.

The Amount of Your First Loan

Another big factor is the amount of the mortgage you already have outstanding. For example, if you already have 70% of your home’s value tied up in a mortgage, a lender might not be willing to give you a second mortgage. The home equity loan takes second lien position, which means the lender probably would not see any money if you defaulted on the loan.

The lower your first lien, the more likely it is that you can borrow from your equity. You can figure out your LTV with the following calculation:

Outstanding principal balance/Home’s current value = LTV

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The lower this number, the more likely it is that you can get approved for a home equity loan.

The Value of Your Home

This probably goes without saying, but you’ll need to know the value of your home. Before the housing crisis, lenders often didn’t require an appraisal for a second lien. They used the latest appraisal from your first mortgage or they ran an automated value on the home.

Today, most banks want to see for themselves how much a home is worth. They want to make sure they are taking a good risk. If your home is not worth enough, your LTV will be too high and the lender will not be able to approve your request for a home equity loan.

Your Income and Its Consistency

Just like with your first loan, you’ll need to prove you can afford the new home equity loan. You do this by proving that you have consistent income. Lenders will look at not only how much you currently make, but your history of income as well.

They want to see that you have a positive stream of income that either stayed consistent or increased. If you have decreasing income patterns, a lender will be concerned about your ability to keep up with your payments for your second loan. Because the lender takes second lien position, they are taking quite a risk and have to be careful.

The bottom line is the amount you can borrow for a home equity loan depends on many factors. The maximum loan amount is likely 85% of your home’s value. From there, your qualifying factors determine what you can afford and get approved to receive. Maximizing your credit score and stabilizing your income are the two best things you can do to improve your chance of approval.

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