What is Loan-to-Value (LTV)?
Summary: Loan-to-Value (LTV) is the ratio between the loan amount and the value of the property. Refinance lenders and mortgage lenders evaluate a borrower’s LTV ratio. Most lenders prefer borrowers to have an LTV ratio of 80% or lower. However, depending on the borrower’s loan type, the LTV ratio may be adjusted. To calculate your LTV, you will need to divide your mortgage amount by the value of the home. The lower the LTV, the better!
What is it?
Loan-to-Value (LTV) determines the ratio between the loan amount and the value of a property. The ratio is used to determine the risk of the loan. Depending on the loan type, requesting a home loan amount close to the home’s appraised value can be viewed as risky for mortgage lenders due to:
- Low home equity.
- Lenders facing potential loss if borrowers’ default on the home loan.
- The value of the home fluctuates.
Benefits and Requirements
Lenders prefer borrowers to have an LTV ratio of 80% or lower, but LTV ratio can be higher depending on the loan type.
- FHA: 96.3%
- VA and USDA: 100%
Depending on the loan, if an LTV ratio is higher than 80%, borrowers may be required to pay private mortgage insurance (PMI). This is a common practice among many lenders, but for more information contact your mortgage lender or refinance lender to understand their requirements.
Benefits of a Low LTV:
- Lower interest rates
- More home equity within the home
LTV Calculation
To calculate the LTV, borrowers will need to divide their mortgage amount by the appraised value of their home. For example, if a borrower purchased a home for $250,000 and had a $50,000 down payment, their mortgage will be $200,000 with an LTV of 80%.
mortgage amount/home value = 200,000/250,000 = .8 x 100 = 80%
LTV naturally decreases as you pay your mortgage and as home values increase.
LTV vs CLTV
Loan-to-Value (LTV) is the ratio between the current mortgage and the home’s value. Combined Loan-to-Value (CLTV), however, is the collection of all debts on the property divided by the home’s value. CLTV includes all home related loans, and loans that use the home as collateral, to help get a better understanding of the borrower’s ability for repayment.
From our example above, let us say in addition to the $200,000 home loan mortgage, the borrower also has a second mortgage worth $30,000.
combination of all loans/home value = 230,000/250,000 = .92 x 100 = 92%
The CLTV increases to 92%.
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