What is LTV or loan-to-value ratio on a mortgage?
From ARM to VA, there are dozens of abbreviations related to the mortgage process. Understanding this shorthand terminology is helpful when navigating homebuying. At times it may seem like you’re learning a new language in addition to buying a new home! We’re here to help.
One useful term is the financial metric known as LTV or loan-to-value ratio. LTV ratio measures lending risk by comparing the loan amount to what your property is worth. The higher the ratio, the riskier the loan. LTV is a consideration in determining whether or not a borrower qualifies for a new home loan or a refinance loan.
How can I calculate the LTV on a mortgage?
During the mortgage process, an underwriter will evaluate such things as credit history, assets, income and debts. The value and condition of the purchase property, the sales price and LTV ratio will also be assessed. Here’s how to calculate the LTV ratio yourself:
- For a refinance, take the mortgage amount divided by your home’s appraised property value, then multiply by 100.
LTV = (mortgage loan amount ÷ appraised property value) x 100
- For a purchase transaction, take the mortgage amount divided by the sale price of your home or home’s appraised property value, whichever is lower, then multiply by 100.
LTV = (mortgage loan amount ÷ appraised property value or home sales price) x 100
What is a good loan-to-value ratio?
While there is no standard “good” loan-to-value ratio, a ratio of 80% or lower is better for more favorable mortgage loan terms. When buying a home with less than 20% down, your LTV ratio will be higher than 80%. Don’t worry; a higher ratio doesn’t necessarily prevent you from being approved for a mortgage. It may mean that you’ll be required to purchase private mortgage insurance (PMI).
The minimum down payment and maximum LTV options for a mortgage are:
- Conventional loan: 3% down payment, maximum 97% of LTV
- FHA loan: 5% down payment, maximum of 96.5% LTV
- Jumbo loan: 20% down payment, maximum of 80% LTV
- USDA loan: 0% down payment, maximum of 100% LTV
- VA loan: 0% down payment, maximum of 100% LTV
The good news is that your LTV ratio can improve over time. As you pay down your loan and your home value increases, your LTV will decrease. You may then qualify to refinance without mortgage insurance, which can save you money each month.
Pre-approval for a home loan gives you direction on what homes you may be able to afford, as well as how much you should save for a down payment to lower your LTV. Mortgage advisors are here to answer all of your mortgage questions until you’re fluent in the language of the homebuying process. Connect with an experienced loan officer today.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.