If you’re getting a mortgage or trying to refinance one, you’ve probably heard of the term loan to value ratio.
But what exactly does it mean?
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What is a Loan-To-Value Ratio?
The loan to value ratio, or LTV ratio is used by lenders that represents the amount of the outstanding loan verses the market value of the property.
The LTV ratio helps lenders determine risk when evaluating a borrowers mortgage application. The higher the LTV ratio is, the higher the risk for the lender.
How Do You Figure The Loan to Value Ratio?
In order to figure the LTV ratio take the loan balance and divide it by the appraised value of the home.
For example if you have a home that appraised for $150,000 and the loan balance is $100,000. Using a calculator enter the loan balance, in this case $100,000.
Enter the Loan Amount
Then divide it by the appraised property value which is $150,000.
Divide by Appraised Value
This will give you the loan to value ratio which is 66 percent.
Equals Loan-to-Value Ratio
Loan-To-Value Ratios Needed For a Mortgage Loan
If you’re getting a new mortgage there is a maximum LTV ratio that varies depending on the type of mortgage loan you’re applying for. FHA loans for instance have a maximum loan to value ratio of 96.5%, meaning you’ll need at least a 3.5% down payment.
Maximum Loan-to-Value Ratio for each Type of Mortgage Loan
- FHA Loans – 96.5% LTV
- VA Loans – 100% LTV
- 203k Loans – 96.5% LTV
- USDA Loans – 100% LTV
- Conventional Loans – Up to 97% LTV
- Jumbo Loans – 85% LTV
Mortgage Insurance Required for Loan-To-Value Ratio Over 80%
If you get a mortgage and have a LTV ratio above 80% you’ll be required to pay mortgage insurance. Unless you have a VA loan, which doesn’t require mortgage insurance.
Mortgage insurance premiums are around 0.50% – 0.85% of the loan amount and it included into your monthly payment.
What is a Good Loan to Value Ratio
If you have a LTV ratio of 80% or lower, it’s considered to be good, presenting less risk to the lender. Not only is having a LTV ratio of 80% good you will avoid having to pay mortgage insurance. High LTV ratio is anything above 80% which is why mortgage insurance is required for loans with a LTV ratio above 80%.
Home Equity Loans and Cash-Out Refinance LTV Ratios
If you’re looking to get a home equity loan, HELOC, or cash-out refinance the loan-to-value ratio is even more important. These loans allow you to access the equity in your home and use it as collateral for a loan. These loans usually max out at 80% loan to value.
For example if you have a home worth $100,000 and the loan balance is $50,000 you can get a home equity loan for up to $30,000.
The home appraisal is very important when figuring your loan-to-value ratio. Property values are constantly in flux, many times home values increase over time. The purchase price is used for the loan-to-value ratio initially when you get a mortgage. When you go to refinance the home’s value will be reassessed.
If your home’s value has increased because of inflation or because you made renovations that increased the value you can get a new home appraisal. Most lenders will have an appraisal done before giving a loan, they want to ensure they are not lending more money than the property is worth.
If you get a low home appraisal it can really raise your LTV ratio. Before an appraiser comes to evaluate your homes value you should take steps to ensure you receive a good appraisal.
Your credit score is one of the most influential factors that determines a borrowers risk. The lower the score, the higher the risk. Your FICO score can even affect the loan to value ratio the lender will accept.
FHA loans are available with just a 3.5% down payment to borrowers with at least a 580 credit score. Borrowers with a score below 580 will have to put 10% down because the FHA has a maximum LTV ratio of 90% for borrowers with a FICO score under 580.
If you have poor credit you will want to have a lower LTV ratio to help compensate for your bad credit or high debt-to-income ratios. Having a low LTV ratio is a compensating factor that can help reduce risk and increase your chances of getting approved.
The Bottom Line…
The loan-to-value ratio is an import metric used by mortgage lenders to determine risk. Having a low LTV ratio reduces the risk and allows the home buyer to get a mortgage while avoiding mortgage insurance (MIP).
Do you know your loan to value ratio?