Routing # 256078446
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What is LTV ratio in mortgages?
What you'll learn: What you need to know about how LTV ratio affects your mortgage eligibility.
EXPECTED READ TIME: 4 MINUTES
May 24, 2024
When you are buying a home, you will notice that there are a lot of different numbers, percentages, and calculations that go into determining your loan’s approval and amount. An important metric that lenders use to measure the amount you can borrow versus the appraised value of the home you are looking to buy is known as the loan-to-value (LTV) ratio.
If you are not entirely familiar with LTV ratios, do not worry. In this article, we will define exactly what LTV is, how to calculate it, and the effect it has on your mortgage.
What is an LTV ratio?
The LTV ratio is a formula used by lenders to assess the risks of lending money to a borrower and is one of many factors that determines your mortgage interest rate. It measures the amount of financing that is being used to buy a home in relation to the value of the property. If you are able to provide a 20% down payment, that would make your LTV ratio 80%.
What is a good LTV ratio?
Generally, when you are buying a home, an LTV of 80% or lower is considered good and you will be able to avoid paying for mortgage insurance.
A higher LTV indicates that there is more risk because if you default on the loan, it is not likely that your lender will be able to cover the remaining amount by repossessing and selling the property.
Knowing your LTV ratio is important, as lenders are only able to approve loans up to a certain ratio. The higher the LTV ratio, the more likely it is your mortgage loan will not be approved.
How to calculate LTV
In order to calculate your LTV ratio, you need to find the total amount being borrowed against the home. That amount is then divided by the total appraised value of the property.
LTV = Loan amount ÷ Property value
After using the formula, you will multiply the resulting decimal by 100 to convert it into a percentage. Let us use an example to see it in action:
Loan amount = $350,000
Appraised property value = $400,000
$350,000 ÷ $400,000 = 0.875
0.875 X 100 = 87.5% LTV
LTV rules for different mortgages
While most lenders will consider a good LTV ratio to be 80% or lower, specific LTV requirements will vary depending on your lender and the type of mortgage you select.
For example, FHA loans offer LTVs up to 96.5% depending on your credit score, and VA loans offer LTVs up to 100%. Even some conventional loans have programs with LTVs up to 97%. It is important to talk to your lender to understand all of your available options.
Though there are many mortgage options that offer borrowers complete financing, it is important to note that you may be required to pay for private mortgage insurance depending on the type of loan you choose and your down payment. Plus, your interest rate will likely be higher compared to borrowers who opt for a larger down payment.
How does LTV affect your home loan?
Your LTV ratio will have a significant impact on your mortgage approval and interest rate. For most homebuyers, it is a good plan to make a down payment of at least 20% of the home’s value if possible. The larger your down payment, the lower your LTV ratio will be.
An LTV ratio exceeding 80% will require you to pay for PMI and result in a higher interest rate due to the risk your lender is taking by financing your home purchase. This can have a long-term impact on the amount of money you spend paying back the mortgage due to higher monthly payments.
How to lower your LTV
It is important to take the time to research and understand how your LTV ratio will impact your home purchase and long-term spending. The good news is, there are steps you can take to reduce your LTV and save more money in the long run. Here is how you can lower your LTV:
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Make a down payment of 20% or more
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Consider more affordable homes
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Pay down your loan’s principal balance
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Increase your home’s value
Generally, you are better off with a lower LTV ratio when you are taking out a mortgage as it can increase your odds of obtaining a favorable home loan.
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Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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