Loan-to-Value Ratio for Mortgage | LTV Definition and Examples

What does LTV mean?

Your “ loan to value proportion ” ( LTV ) compares the size of your mortgage loan to the value of the base .
For exemplar : If your home is worth $ 200,000, and you have a mortgage for $ 180,000, your LTV ratio is 90 % — because the lend makes up 90 % of the sum price .
You can besides think about LTV in terms of your down payment .
If you put 20 % down, that means you ’ ra borrowing 80 % of the home plate ’ s rate. So your LTV proportion is 80 %.

LTV is one of the independent numbers a lender looks at when deciding to approve you for a home purchase or refinance .

In this article (Skip to…)

Why loan-to-value ratio matters for home buyers

Yout LTV ratio is important as a home plate buyer because it ’ south one of the main criteria mortgage lenders use to determine your eligibility for a loan .
typically, buyers with lower LTV ratios are more likely to :

  • Get approved by mortgage underwriting
  • Qualify for lower interest rates
  • Avoid paying private mortgage insurance premiums (on conventional loans)

Keep in heed, flush paying half a percentage lower interest rate can equal lower monthly mortgage payments — and over the life sentence of the lend, that could amount to thousands of dollars in savings .

What’s a good loan-to-value ratio?

by and large, 80 % LTV is considered a good loan-to-value ratio. If you ’ rhenium buy a home plate, you achieve an 80 % LTV by making a 20 % polish payment .
Homeowners with an 80 % LTV do not have to pay for private mortgage indemnity ( PMI ). And they typically qualify for lower interest rates. So there are substantial perks to making a big down payment and getting your LTV to 80 % or lower .
however, you can qualify for a mortgage loanword with an LTV much higher than 80 %. In some cases, evening a 100 % LTV is allowable ( meaning you make no depressed payment at all ) .

LTV for home buying vs. refinance

Lenders use loan-to-value calculations on both buy and refinance transactions. But the mathematics to determine your LTV changes based on the type of lend .

  • Home purchase LTV is based on the sales price of the home — unless the home appraises for less than its purchase price
  • Refinance LTV is always based on the appraised value of the property, not the original purchase price of the home.

Loan-to-value is particularly important when using a cash-out refinance, as the lender ’ s maximum LTV will determine how much equity you can pull out of your dwelling .

How to calculate your loan to value ratio

Calculating your loan-to-value is dim-witted. All you do is take your loanword amount and divide it by the buy price — or, if you ’ rhenium refinance, watershed by the survey value. then breed by 100 to get your LTV ratio .
(Loan Amount / Purchase Price or Appraised Value) X 100 = LTV
The loan-to-value ratio is always expressed as a percentage. thus if your resultant role is 0.75, for case, your LTV is 75 % .

Loan to value ratio examples

here are a few examples to illustrate the concept of loan-to-value for mortgages .

Example 1: LTV for a home that appraises above its purchase price

When you buy a home that appraises for more than the buy price, your loan to rate proportion is based on the buy price preferably than the marketplace prize of the property .

  • House price: $100,000
  • Appraised value : $110,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • 80,000 / 100,000 = 0.8
  • LTV ratio: 80%

Example 2: LTV for a home that appraises below its purchase price

If you ’ re buy a home and the survey measure of the place is lower than the purchase price, your LTV is based on the survey value rather. This will lead to a higher LTV proportion .

  • House price: $100,000
  • Appraised value : $90,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • 80,000 / 90,000 = 0.89
  • LTV ratio: 89%

Example 3: LTV for a mortgage refinance

a long as you don ’ t have a second mortgage on your family — like a family fairness lend or home equity agate line of credit rating ( HELOC ) — LTV is calculated the lapp for a refinance as for a home leverage .
fair remember, you ’ ll use the measure rate of your home quite than the purchase price .

  • Home value: $100,000
  • Loan balance: $80,000
  • Equity: $20,000
  • 80,000 / 100,000 = 0.8
  • LTV ratio: 80%

What are CLTV and HCLTV?

When you refinance with a moment mortgage secured by the property, the lend to value calculation is a little different. You ’ ll have one or two new ratios to consider :

  • CLTV (Combined loan-to-value) measures your first and second mortgage combined against your appraised home value. CLTV applies to both home equity loans and home equity lines of credit
  • HCLTV (High combined loan-to-value) measures your highest possible loan to value ratio, including any untouched balance on your second mortgage. HCLTV applies only if you have a HELOC

here ’ s how each one is calculated .

CLTV: Refinancing with a home equity loan

Calculating CLTV is relatively bare. You add your first and second mortgage balances together, and separate this come by the home ’ sulfur appraised value .
See below how the LTV differs from the CLTV .

  • Home value: $100,000
  • Loan balance: $80,000
  • Second loan balance : $10,000
  • Equity: $10,000
  • 80,000 / 100,000 = 0.8
  • LTV ratio: 80%
  • (80,000 + 10,000) / 100,000 = 0.9
  • CLTV ratio: 90%

HCLTV: Refinancing with a home equity line of credit

When you refinance with a dwelling equity line of credit, a lender will consider your wax irregular mortgage in its LTV calculation — evening if you haven ’ metric ton withdrawn the broad amount available to you .
Because of this, you actually end up with three measures of your loan-to-value .
The standard LTV ; the CLTV, which combines your first gear mortgage with the measure you ’ ve withdraw from your second mortgage ; and the HCLTV, which considers your full foremost and second mortgage balance, careless of the total you ’ ve indrawn .
“ CLTV and LTV are the most important to understand, ” says Jon Meyer, The Mortgage Reports lend adept and licensed MLO .

  • Home value: $200,000
  • Loan balance: $100,000
  • Available second loan balance: $80,000
  • Amount of second loan drawn out: $40,000
  • Equity: $20,000
  • 100,000 / 200,000 = 0.5
  • LTV ratio: 50%
  • (100,000 + 40,000) / 200,000 = 0.7
  • CLTV ratio: 70%
  • (100,000 + 80,000) / 200,000 = 0.9
  • HCLTV ratio: 90%

Whether you ’ rhenium buy or refinance, your lend ’ second loan-to-value is significant because it helps to determine your mortgage rate and your loanword eligibility .

Why LTV is important in real estate

LTV is important when you buy a home plate or refinance because it determines how hazardous your loanword is .
The more you borrow compared to your home ’ second value, the “ riskier ” it is for lenders. That ’ second because if you default on the loan for some reason, they have more money on the line .
That ’ mho why all mortgages have a maximum LTV to qualify. The maximum loan-to-value can besides be thought of as a minimum down requital.

For case, the popular FHA lend program allows a down payment of just 3.5 %. That ’ s the like as saying the plan has a soap LTV of 96.5 % — because if you make a 3.5 % down payment, the most you can borrow is 96.5 % of the base monetary value .

What is a good loan to value ratio?

When qualifying for a mortgage lend, an 80 % loan-to-value proportion is ideal because it minimizes a lender ’ randomness risk of losing money if the borrower defaults. That ’ second why home buyers with 20 % down, and an 80 % LTV, get particular perks like avoiding mortgage indemnity .
“ From a lender ’ randomness position, a lower LTV is constantly well, ” says Meyer .
But — and it ’ s a big but — it doesn ’ thymine always make sense to aim for 80 % LTV. Because a 20 % down requital is plainly not accomplishable for many home buyers, particularly first-time home buyers .
consequently, a good loan-to-value ratio depends on your home buy goals. For one person, 100 % might be a good LTV. For another, 70 % might be ideal .
Here’s what to consider.
If your goal is to make a small down requital and buy a home preferably, front for one of these mortgage programs with high LTV ratio allowances :
If your goal is to avoid higher interest rates, get the lowest monthly payment on your loan, or minimize your overall lend close costs, you should aim for a lower LTV. This normally means getting a ceremonious mortgage with 10 % -20 % down .

Four high-LTV loans for home buyers

There are a count of lend programs specifically geared toward homeowners with high LTV ratios. There are even some programs which ignore loan-to-value all in all .
here is a brief review of the more common high-LTV loan types .

1. VA loan: up to 100% LTV allowed

virginia loans are guaranteed by the U.S. Department of Veterans Affairs .
VA lend guidelines allow for 100 % LTV, which means that no down payment is required for a VA loanword .
The catch is, VA mortgages are only available to certain home plate buyers, including :

  • Active-duty military service persons
  • Veterans
  • Military spouses
  • Members of the Selected Reserve or National Guard
  • Cadets in the U.S. Military
  • Air Force or Coast Guard Academy members
  • Midshipman in the U.S. Naval Academy
  • World War II merchant seamen
  • U.S. Public Health Service officers
  • National Oceanic & Atmospheric Administration officers

Learn more about the benefits of 100 % LTV VA finance here .

2. USDA loan: Up to 100% LTV allowed

department of agriculture loans are insured by the U.S. Department of Agriculture. USDA loans allow for 100 % LTV, with no down payment required .
many besides know the program as “ Rural Housing. ” You can find department of agriculture loans in rural parts of the country, but besides in many suburbs .
Learn more about USDA finance and how to qualify here .

3. FHA Loan: Up to 96.5% LTV allowed

FHA loans are insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development ( HUD ) .
FHA mortgage guidelines require a downpayment of at least 3.5 %. Unlike VA and USDA loans, FHA loans are not limited by military background or location — there are no special eligibility requirements .
FHA loans can be an particularly commodity equip for first-time base buyers and buyers with less-than-perfect credit scores .

4. Conventional loan: up to 97% LTV allowed

conventional loans are guaranteed by Fannie Mae or Freddie Mac. Both groups offer 97 % LTV buy mortgages, which means you will need to make a downpayment of 3 % to qualify .
conventional 97 loans are available via most mortgage lenders, and secret mortgage indemnity ( PMI ) will often be required on lead of your monthly mortgage requital .
As compared to an FHA loan, conventional loans to 97 % LTV are advised for homeowners with eminent accredit scores. In most other cases, FHA loans are preferred .

Four high-LTV mortgage refinances

High-LTV mortgages can be simpler for refinance transactions than they are for purchases. Multiple union agencies make no appraisal or streamline refinance programs available to U.S. homeowners .

1. FHA streamline refinance

The FHA Streamline Refinance is a especial refinance broadcast for homeowners with FHA mortgages. official guidelines for the FHA Streamline Refinance forfeit appraisal requirements, which means the home ’ mho LTV doesn ’ triiodothyronine topic — a well thing if your place measure did not increase .

2. VA streamline refinance

The VA Streamline Refinance is a special refinance plan for homeowners with existing VA home loans. The official name of the VA Streamline Refinance is the Interest Rate Reduction Refinance Loan ( IRRRL ). It ’ second sometimes called the VA-to-VA loanword .
similar to its FHA cousin, the VA Streamline Refinance does not require an appraisal, nor does it require the verification of income, employment or credit .

3. USDA streamline refinance

The USDA Streamline Refinance is available to homeowners with existing USDA mortgages only. Like the FHA and VA streamline programs, the USDA refinance waives the need for a home appraisal. The broadcast is presently in fly phase, and available in 19 states .

4. Mortgage relief refinance

Over the years, there have been a act of mortgage relief refinance programs designed to help homeowners who are subaqueous on their loans .
Being ‘ subaqueous ’ means you owe more on the home than it is presently deserving. As a result, your LTV is over 100 % .
For example, imagine you have a mortgage out for $ 150,000 on a dwelling that ’ mho besides worth $ 150,000. But your home loses respect, and is now worth merely $ 125,000. Your newfangled loanword to value ratio is 120 % .
Having an LTV above 100 % would normally disqualify you from refinancing. But with a special mortgage easing program, you can refinance an submerged home into a lower rate to make your mortgage more manageable .
You can read about current mortgage relief refinance programs here .

Find out if you qualify for a mortgage

Loan-to-value is the ratio of how a lot you ’ ra adopt compared to the rate of your home. It ’ s a dim-witted formula, but it ’ s the basis for most mortgage lend .
once you know your LTV, you can figure out which mortgages you ’ re probable to qualify for — and which lender offers the best rates for your site.

source : https://www.peterswar.net
Category : Finance

Related Posts

How to Calculate Credit Card Interest Rates

interest rates are one of the ways to work out how much it will cost you to use your credit card, along with other charges and fees….

What debt collectors can & cannot do

If you are dealing with a debt collector, you have protections under the law. A debt collector must not mislead, harass, coerce or act unconscionably towards you….

Can You Afford a New Home? How to Determine Your Homebuying Budget

Can You Afford a New Home? How to Determine Your Homebuying Budget As with any major purchase, determining what you can afford before you look for a…

Why Did My Credit Score Drop?

Why Did My Credit Score Go Down When Nothing Changed? sometimes your mark does change based on factors outside of your control, but most times your behavior…

Why Do I Owe Taxes To The IRS & How To Avoid Them

Are you wondering why you owe indeed much in taxes this year ? Want to make certain you never owe a big tax bill – or any…

The 5 reasons why your credit score might suddenly drop

Select ’ s editorial team works independently to review fiscal products and write articles we think our readers will find useful. We earn a perpetration from affiliate…