adminAbout Loan-to-Value (LTV) Ratio:
The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.
Additionally, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender. This type of insurance is called private mortgage insurance (PMI).
- Loan-to-value (LTV) is an often used ratio in mortgage lending to determine the amount necessary to put in a down payment and whether a lender will extend credit to a borrower.
- Lower LTVs are better in the eyes of lenders but require borrowers to come up with larger down payments.
- Most lenders offer mortgage and home equity applicants the lowest possible interest rate when the loan-to-value ratio is at or below 80%.
- Mortgages become more expensive for borrowers with higher LTVs.
- Fannie Mae’s HomeReady and Freddie Mac’s Home Possible mortgage programs for low-income borrowers allow an LTV ratio of 97% (3% down payment) but require mortgage insurance (PMI) until the ratio falls to 80%.
How to Calculate the Loan-to-Value Ratio:
Interested homebuyers can easily calculate the LTV ratio of a home. This is the formula:
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An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000. This results in an LTV ratio of 90% (i.e., 90,000/100,000).
Understanding the Loan-to-Value (LTV) Ratio:
Determining an LTV ratio is a critical component of mortgage underwriting. It may be used in the process of buying a home, refinancing a current mortgage into a new loan, or borrowing against accumulated equity within a property.
Lenders assess the LTV ratio to determine the level of exposure to risk they take on when underwriting a mortgage. When borrowers request a loan for an amount that is at or near the appraised value (and therefore has a higher LTV ratio), lenders perceive that there is a greater chance of the loan going into default. This is because there is very little equity built up within the property.
Mortgage Example of LTV:
For example, suppose you buy a home that appraises for $100,000. However, the owner is willing to sell it for $90,000. If you make a $10,000 down payment, your loan is for $80,000, which results in an LTV ratio of 80% (i.e., 80,000/100,000). If you were to increase the amount of your down payment to $15,000, your mortgage loan is now $75,000. This would make your LTV ratio 75% (i.e., 75,000/100,000).
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