What Is the 83/10 Mortgage Guideline?
Discover how the 83/10 mortgage guideline works. This specific lending rule determines your maximum borrowing capacity and cash-out for a second loan.
The 83/10 mortgage guideline is a specific lending rule that determines how much equity a homeowner can borrow against. It is most frequently applied by lenders when underwriting second mortgages or home equity lines of credit (HELOCs).
Defining the 83/10 Guideline
The “83” in the name refers to the maximum allowable Combined Loan-to-Value (CLTV) ratio. A CLTV is a figure calculated by adding the balance of the original mortgage to the amount of the new loan and dividing that sum by the home’s current appraised value.
Under this rule, the total of all liens on the property cannot exceed 83% of its market value. The “10” represents a cap on the amount of cash-in-hand a borrower can receive from the loan proceeds. After the new loan pays off any existing debts or closing costs, the borrower cannot walk away with more than $10,000 in cash.
Calculating Your Eligibility
Applying the 83/10 guideline to your own finances involves a straightforward calculation. First, you must determine your maximum CLTV. To do this, you need a current appraisal of your home’s value. For instance, if your home is appraised at $500,000, the maximum total debt allowed against it under the 83% CLTV rule would be $415,000, which is 83% of the appraised value.
Imagine you have a remaining balance of $350,000 on your primary mortgage. Subtracting this from the $415,000 maximum allowed debt leaves $65,000. This figure represents the maximum amount you could potentially borrow with a second mortgage or HELOC. If you sought a new loan for $50,000, your total debt would be $400,000 ($350,000 + $50,000), resulting in an 80% CLTV, which is comfortably below the 83% ceiling.
The final step is to consider the cash-out restriction. The loan proceeds must first be applied to any debts being consolidated or to cover the loan’s closing costs, which can range from 2% to 5% of the loan amount. If your new $50,000 loan has $3,000 in closing costs, you would be left with $47,000. Since this amount exceeds the $10,000 cash-out limit, the lender would likely restructure the loan, perhaps by reducing the total loan amount, to ensure the cash you receive does not surpass the $10,000 threshold.