What is the loan-to-value (LTV) ratio?


The loan-to-value (LTV) ratio represents the ratio between the amount of the loan you take out and the value of the property that serves as collateral for the loan. Understanding LTV can help you find the right loan and down payment for you. Let’s analyze LTV in detail.


What is the loan-to-value (LTV) ratio?


The LTV compares the amount of the loan you get to the value of the house. LTV is generally expressed as a percentage. Lenders use LTV to calculate the risk they take when they loan you money. They also use it to determine which loans you are eligible for based on the amount of your down payment or the accumulated capital you have.


How is LTV calculated?


To calculate your LTV, divide the amount of your loan by the value of the property you want to buy or refinance. You can convert this number to a percentage by multiplying it by 100.

For example, let’s say you want to buy a house that is worth $ 200,000. You offer the seller $ 150,000 and he accepts your offer. When you apply for a mortgage, you inform your mortgage lender that you will make a down payment of 20%, or $ 30,000.

First, subtract your down payment ($ 30,000) from the total sale price ($ 200,000) to get $ 170,000. This is the amount you plan to borrow. Next, divide the loan amount ($ 170,000) by the property’s value ($ 200,000) and you get 0.85. Multiply the result by 100 to calculate your LTV, which is 85%.


What is considered a good loan-to-value ratio?


Generally, the lower your LTV, the better your chances of getting your application approved and giving you a lower interest rate. With an LTV of 80% or less, you’ll be exempt from paying for private mortgage insurance and qualify for a wide variety of loan options.

A higher LTV means a higher risk for the lender for two reasons:

  • He has to lend you more money for the purchase. If the value of the home goes down, the lender will lose more money.
  • Buyers who invest more money up front are less likely to leave the house. When buyers have a larger investment in the loan, they are less likely to default.

Different types of loans have different LTV requirements. These are two of the most common types of mortgages and their maximum loan-to-value limits.

Conventional loans

Conventional loans generally meet the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored companies that buy mortgages from lenders. Conventional loans tend to have higher approval requirements than other types of loans.

You can get a conventional loan with an LTV of up to 97%. However, your LTV may have to be lower, depending on your situation and the exact type of loan you want. With an LTV of 80% or less, you will be exempt from paying for private mortgage insurance.

FHA loans

FHA loans are backed by the Federal Housing Administration, so lenders can offer mortgages to borrowers who may not qualify for other loans. You can get an FHA loan with a maximum LTV of 96.5%.

VA loans

VA loans, which are endorsed by the Department of Veterans Affairs, are a benefit to active duty members and service veterans. They are one of the few types of loans that allow you to borrow the full value of the home – up to a 100% LTV. This means that you do not need to make a down payment to obtain a VA loan. You can also refinance up to 120% of your home’s value with a VA loan.

USDA Loans

USDA loans can be used to purchase homes in eligible rural areas (although the USDA definition of “rural” also includes many suburban areas).

For USDA loans, a down payment is not required, so you can get a loan with an LTV of up to 100%.

Jumbo loans

Jumbo loans are mortgages that exceed the limits of conventional loans. The loan limit for most areas is $ 548,250, although these limits are higher in certain expensive areas of the country.

Jumbo loans are one of the most risky types of mortgages for lenders, so they have strict LTV requirements. You will need an LTV that does not exceed the range of 70% to 85% to get a jumbo loan.


How to reduce your LTV


If your LTV is too high for you to qualify, here are some things you can do.

Make a higher down payment

Offering more money as a down payment is one of the fastest ways to lower your LTV. Increasing your down payment reduces the amount your lender must give you, which automatically lowers your LTV. A mortgage calculator can help you see how the amount of your down payment will affect your monthly payments.

Buy a lower priced home

If you can’t get a higher down payment, it may be better to find a more affordable home. If you find a lower priced house, you will borrow less money, which will lower your LTV if you keep the same down payment.

Let’s compare the LTV of two loans. One house is worth $ 200,000 and another is $ 175,000. Suppose you are willing to make a down payment of $ 15,000 for both of you.

If you bought your first home, you should ask your mortgage lender for $ 185,000. This means that your LTV would be 92.5%.

If you bought the second home, you would only ask for a loan of $ 160,000. This means that your LTV would be 91.4%, more than one percentage point lower.

Another option is to make a lower offer. If you think the price of the house is excessive or if there is no competition to buy it, you may be able to convince the seller to lower the sale price, especially if they are excited to sell it.

Find the right type of loan

If you can’t get a lower-priced home or a higher down payment, it may be best to look for low-cost or no-down payment loan options. Conventional loans can be obtained with a down payment of only 3%. For USDA and VA loans, no down payment is required, but you must meet specific criteria to qualify.

Quicken Loans® Rocket Mortgage® can show you the options for which you are eligible based on your LTV. Apply now to see our experts’ mortgage tips.


Summary


The loan-to-value (LTV) ratio shows the amount of the loan compared to the value of the home. To calculate your LTV, divide the amount of your loan by the value of the home.

A good LTV is a lower LTV. With an LTV that does not exceed 80%, you will be able to access most options, but you can buy a home with an LTV of up to 100% if you qualify for a USDA or VA loan.

If your LTV is too high, you can offer a higher down payment, buy a lower-priced house, or choose another type of loan. Rocket Mortgage® can show you exactly which loans you qualify for based on your LTV and other factors.


Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *