How to Borrow More Than the Value of Your Home

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Lenders base your mortgage on the value of your home. They usually have limits as to how much you can borrow compared to the home’s appraised value. For example, FHA loans allow up to a 97.5% LTV. This means you can borrow up to 97.5% of the home’s value. Some loans, however, allow you to go even higher than that amount.

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It’s not the most common scenario, so you may have to shop around. But, knowing your options can help you make the right choice.

Home Equity Loans

Some banks provide 125% LTV home equity loans. They allow borrowers to borrow as much as 25% more than the home is worth. The tradeoff is usually a higher interest rate. You can think of it as like a personal loan. Beyond 100% LTV, the loan has no collateral. The bank can take your home if you default, but they won’t get the same amount back when selling.

The benefit of the home equity loan versus a personal loan, though, is the tax write-off. In many cases, you can write off the interest paid on the HELOC. You can’t write any of the interest off that you pay on a personal loan.

You’ll have to shop around to find a lender offering this, though. Prior to the housing crisis, it was very common. Today, lenders are more cautious. Generally, they require exceptionally high credit scores and low debt ratios to qualify for a high LTV home equity loan.

Refinancing FHA or VA Loans

If you are a current FHA or VA loan holder, you are in luck. Both programs offer a streamline refinance program. As a part of either program, you don’t have to get a new appraisal. The lender can use the original value of your home for qualifying.

You could be underwater and still refinance. While you can’t take cash out with this program, you can secure a lower interest rate. You can also change your program. Let’s say you have an ARM and want a fixed rate loan. You aren’t stuck in the ARM because your home lost value. The FHA and VA both allow lenders to write a new loan based on the original appraised value.

Rehab Loans Offer High Value Mortgages

The most popular rehab loan is the FHA 203(k) loan. This program works much the same way as an FHA loan for the purchase or refinance component. In addition, though, you can borrow money to fix up your home. This works for both a purchase and a refinance.

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In order to qualify, you’ll need to meet the requirements of the FHA loan. This means:

  • Minimum credit score of 620
  • Down payment of 3.5% of the purchase price
  • Debt ratios around 31% and 43%
  • Find a contractor the lender approves of
  • Have the improvements approved by the lender
  • Hire a 203(k) loan consultant and pay the fees

If you qualify, the lender will make sure the renovations meet FHA code and add value to the home. The lender will order an appraisal report that shows the potential value of the home after renovations. This is how the lender determines if the changes are worth it.

If the lender approves your FHA 203(k) loan, it will fund like a normal FHA loan for the purchase and/or refinance portion. From there, the lender will distribute the funds as they determine necessary and according to the contract. In most cases, they allow a disbursement at the closing, and at each inspection. The final disbursement doesn’t get released until after the final inspection. All renovations must be complete within 6 months.

Today, it’s much more difficult to secure a loan for more than 100% of the value of your home. You’ll have to do your homework and shop around. Do your research and see what each lender specializes in. Some lenders that hold loans on their own books have portfolio programs they offer. This may include a higher LTV program.

No matter which type of loan you choose, make sure you get the best rates and fees. Don’t fall for the first lender that offers you a loan. If it sounds too good to be true, really research what they offer. Read the fine print and ask for referrals. Your home is a very large investment. You don’t want to get in over your head and be unable to afford the payments.

Borrowing more than 100% of the home’s value isn’t always the best choice. But, with the right circumstances, it can be a great way to get ahead or fix up your home.

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