LTV stands for “Loan-to-Value”. The loan to value ratio is the loan amount compared to the apprised market value of a property. Lenders use LTV ratios to determine the amount of equity a borrower will have on a property.
The lower the LTV on a mortgage the less risky the loan is, this leads to better loan terms. This is because if a borrower defaults on a home loan they will have more equity in the home and have a better chance of recouping their money.
How to calculate the LTV ratio
To calculate the LTV ratio you just need to divide the amount of the loan by the apprised value of the property.
Example: A home is appraised for $200,000, you have a 10% down payment ($20,000) you will need a mortgage loan for $180,000.
Simply enter 180,000 on your calculator or phone
Then divide it by 200,000
You’ll get 0.9, or 90% this is your LTV ratio.
LTV Ratios for Mortgage Loans
Most home loans will have a maximum DTI ratio they can lend on. There are only two types of mortgages that offer 100% financing. VA and USDA loans. Every other mortgage program available requires a lower DTI ratio. Here are the max LTV ratios for each type of mortgage.
- FHA loans – 90% LTV for borrowers with a 500-579 credit score – 96.5% LTV with a 580+ score
- VA Loans – 100% LTV
- USDA Loans – 100% LTV
- 203k Loans – 96.5% LTV
- Conventional Loans – 80% – 95% LTV
- Jumbo Loans – 70% – 85% LTV
If the maximum LTV ratio for a loan is 95% you will need a 5% down payment to cover the rest of the purchase.
How LTV affects Mortgage Insurance
Mortgage insurance (PMI or MIP) is insurance on the loan in case the borrower defaults on the loan. For most mortgages PMI is required for mortgages with a LTV ratio above 80%. This equals big savings for homebuyers because mortgage insurance costs between 0.51% – 0.85% of the loan amount annually. By putting at least 20% down you will save thousands of dollars each year.
Cancelling PMI once your LTV drops below 78%
Most loans will cancel PMI on a mortgage once the LTV ratio drops below 78%. The FHA recently made a change regarding their mortgage insurance rules. FHA loans now require MIP for the life of the loan for borrowers who put less than a 10% down payment on their home. However, even though this is the case you can still refinance your FHA loan into a conventional loan after dropping your LTV below 78%. With a conventional loan you will not need PMI with a LTV ratio below 78%.
The higher the LTV ratio the harder it is to get a mortgage
Because a high lTV ratio means you have less skin in the game and less equity, it’s more risky for a lender. FHA loans require a 3.5% down payment so the loan is for 96.5% of the home’s value. If a borrower defaults on their mortgage, the lender will be stuck with the property and will have a hard time recouping their money. Because of this, there is more paperwork and documents required with high LTV loans.
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