There are several factors that determine the amount of money that someone can borrow using a home equity loan. The borrower's credit score, the value of the home, available equity and product restrictions are part of the underwriting equation. People can take out a home equity loan as first or second lien on a residential property.
Banks secure home loans against residential properties and typically the loan amount cannot exceed 80 percent of the value of the home. If a first mortgage exists, the combined-loan-to-value of the two loans usually cannot exceed 80 percent of the value of the property. Some banks limit overall loan amounts to $200,000, or they lower the maximum LTV ratio on homes with values in excess of $250,000.
Minimum credit scores required by lenders vary from bank to bank but generally scores of 620 or better are required by people applying for home loans. Some lenders only enable people with scores of 700 or more to take out home loans for large dollar amounts or high LTV ratios. On joint applications, both applicants must have satisfactory scores. Banks do not look at the average combined score of applicants but instead require each applicant to meet the minimum required score.
Lenders use debt-to-income calculations to determine affordable payments for loan applicants. Debt calculations include mortgages, hazard insurance, property tax, credit card payments, student loans, car loans and other existing credit related debts. Underwriters divide the monthly debt payments into the applicant's gross monthly income to determine their DTI ratio. Generally, lenders restrict DTI ratios to between 38 and 50 percent. People with higher credit scores and more equity are more likely to get approved for loans with high DTI ratios than people with mediocre credit.
Banks use LTV ratios, DTI ratios and credit scores to determine interest rates. People with high ratios and low credit scores pose a higher risk and are offered higher interest rates than low-risk applicants. The interest rate determines the payment amount and having established a payment amount, lenders must ensure it does not exceed DTI limits. If proposed payments are too high, downward adjustments are made to the loan amount. Most banks have loan amount minimums, and some people can only qualify based on DTI or LTV for loans that do not meet minimum loan amounts.