LOAN TO VALUE: Definition, How to Calculate it, Mortgage & Importance

Loan to value ratio is a word used frequently in real estate. But what precisely is LTV, and how does your loan-to-value ratio affect the mortgage lending process? The quick answer is that the loan-to-value ratio is a metric that lenders typically use to calculate any risks associated with lending to you. Here, we’ll take a closer look at what loan to value refers to in real estate, how to calculate it, and its potential impact on your mortgage.

What Is the Loan to Value (LTV) Ratio?

The loan-to-value (LTV) ratio is a risk evaluation used by financial institutions and other lenders before authorizing a mortgage. Loan assessments with high LTV ratios are typically considered higher-risk loans. As a result, if the loan is authorized, the interest rate will be greater.

Furthermore, a loan with a high loan to value ratio may require the borrower to acquire mortgage insurance to mitigate the lender’s risk. This is referred to as private mortgage insurance (PMI).

How Does Loan to Value Ratio Work?

When reviewing your application for a secured loan, such as a mortgage, lenders consider your loan to value ratio. When purchasing a property, the down payment is often a proportion of the purchase price. If you’re borrowing money to pay for the rest, your lender will also send out an appraiser to establish the value of the property. (Keep in mind that the appraised value may or may not correspond to the purchase price.)

The lender can compute your loan to value ratio once the appraiser has determined the home worth. If you put down 10% of the home’s value and borrow the rest, your mortgage’s loan to value ratio will be 90%. If you put down 20% of the home’s worth, your mortgage loan to value will be 80%. The greater your down payment, the lower your LTV ratio.

Homeowners who qualify for special financing, such as a VA loan or a USDA loan, may be able to obtain a mortgage with a loan-to-value ratio of 100%. Everyone else, on the other hand, must pay a portion of the home’s initial cost so that their LTV ratio is 97% or lower.

How Do You Calculate the Loan-To-Value Ratio?

To calculate and ascertain your loan to value ratio, divide the loan amount by the asset’s value and multiply the result by 100 to get a percentage:

LTV = (Amount owed on the loan ÷ Appraised value of asset) × 100

If you’re buying a $300,000 house and your loan amount is $250,000, your LTV ratio at the time of purchase is ($250,000/$300,000) x 100, or 83.3%.

In other words, the LTV ratio is the percentage of the appraised value of the property that is not covered by your down payment. The LTV is 85% if you put 15% down on a loan that covers the remainder of the buying price.

Lenders and federal housing regulators are primarily concerned with the LTV ratio at the time the loan is provided, but you may calculate it at any moment during the loan’s payback period by dividing the loan balance by the appraised value of the property. As you repay the loan, the amount due lowers, lowering the LTV. If the value of your home rises over time, the LTV decreases. However, if the property’s value falls (for example, if housing prices in the local market decrease dramatically), the LTV may rise.

When an LTV ratio exceeds 100%, a borrower is termed “underwater” on the loan, which occurs when the market value of the property is less than the loan total. On loans with large closing costs, LTVs greater than 100% are also conceivable early in the repayment period.

How is a Loan To Value Ratio Used by Lenders?

LTV ratio is one risk assessment that lenders use when analyzing your loan application. Lenders often award lower LTV ratio loans lower interest rates. Making a larger down payment on a property may result in a lower interest rate on your mortgage.

LTV ratio isn’t the only criteria lenders consider while considering your loan application. To assess your risk as a borrower, they also consider your credit score, debt-to-income ratio, payment history, and income.

If you are considering purchasing a home, taking the time to repair your credit and minimize your debt-to-income ratio may help you secure better rates.

Variations on Loan-to-Value Ratio Rules

When it comes to LTV ratio regulations, different loan kinds may have varying rules.

#1. FHA Loans

FHA loans are mortgages geared for borrowers with low-to-moderate income. They are guaranteed by the Federal Housing Administration (FHA) and issued by an FHA-approved lender.

FHA loans provide lower down payments and credit requirements than many commercial loans. FHA loans offer an initial LTV ratio of up to 96.5%, but they demand a mortgage insurance premium (MIP) that is paid for the life of the loan (regardless of how low the LTV ratio subsequently becomes).

#2. VA and USDA Loans

Even though the LTV ratio can be as high as 100%, VA and USDA loans, which are available to current and former military personnel as well as those living in rural regions, do not require private mortgage insurance.However, there are additional fees for both VA and USDA loans.

#3. Fannie Mae and Freddie Mac

For low-income applicants, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible mortgage programs offer an LTV ratio of 97%. They do, however, require mortgage insurance until the ratio falls below 80%.

There are simplified refinancing alternatives for FHA, VA, and USDA loans. These waive appraisal standards, thus the LTV ratio of the home has no bearing on the loan. For debtors with an LTV ratio greater than 100%—also known as being “underwater” or “upside down”—Fannie Mae’s High LTV Refinance Option and Freddie Mac’s Enhanced Relief Refinance are accessible alternatives.

What Is a Good Loan To Value Ratio?

An LTV ratio of 80% or less is excellent when using a conventional loan to purchase a home. PMI is often required on conventional mortgages with LTV ratios larger than 80%, which can add tens of thousands of dollars to your payments over the life of the loan.

Some government-backed mortgages allow for extremely high LTV ratios. The minimal down payment for a Federal Housing Administration (FHA) loan, for example, is 3.5% (LTV ratio of 96.5%). Loans from the United States Department of Agriculture and the Department of Veterans Affairs demand no down payment at all (100% LTV). To counteract the risk associated with their higher LTVs, these loans often demand mortgage insurance or contain additional fees in the closing costs.

With auto loans, the LTV ratio is less important. While a higher LTV ratio on a car loan may result in higher interest rates, there is no analogous threshold to the 80% LTV that yields the best mortgage loan conditions.

How to Lower Your Loan To Value

In general, lowering the LTV on your loans, particularly home loans, means lower total costs throughout the life of the loan. Because the LTV ratio is determined by only two variables—the loan amount and the asset value—the methods for lowering LTV are simple:

Increase your down payment. If you’re eager to buy a house or automobile, saving for a large down payment may test your patience, but it may be worth it in the long run.
Set your sights on less expensive targets. Buying a property that is a little older or smaller than your dream home may allow you to use your present savings to cover a bigger amount of the purchase price.

Whether you’re applying for a car loan or a mortgage, you should understand how your LTV ratio influences overall borrowing costs, what you can do to reduce LTV, and how doing so can save you money over the life of the loan.

Mortgage Example of Loan To Value

For example, imagine you purchase a $100,000 property. The owner, though, is willing to sell it for $90,000. If you put down $10,000, your loan will be for $80,000, resulting in an LTV ratio of 80% (i.e., 80,000/100,000). If you increase your down payment to $15,000, your mortgage loan is now worth $75,000. This would increase your LTV ratio to 75% (75,000/100,000).

LTV vs. Combined LTV (CLTV)

While the LTV ratio considers the influence of a single mortgage loan when purchasing a home, the combined loan-to-value (CLTV) ratio considers the total value of all secured loans on a property.This includes not only the primary mortgage in the LTV calculation, but also any second mortgages, home equity loans or lines of credit, or other liens.

The CLTV ratio is used by lenders to estimate a prospective house buyer’s risk of default when more than one loan is employed, such as if they will have two or more mortgages, or a mortgage plus a home equity loan or line of credit (HELOC). Lenders are generally prepared to lend at CLTV ratios of 80% or higher to borrowers with excellent credit. Because it is a more comprehensive assessment, primary lenders are more lenient with CLTV standards.

Let’s take a deeper look at the distinction. The LTV ratio solely takes into account the primary mortgage balance on a residence. As a result, if the primary mortgage balance is $100,000 and the home is worth $200,000, the LTV is 50%.

Consider the following scenario: the house has a $30,000 second mortgage and a $20,000 HELOC. The combined loan-to-value is now ($100,000 + $30,000 + $20,000 / $200,000) = 75%, which is a significantly higher ratio.

These combined considerations are especially critical if the mortgagee defaults and the property goes into foreclosure.

What Does 60% LTV Mean?

The loan-to-value ratio compares the amount of the mortgage to the worth of the property. It is given as a percentage. If you borrow $80,000 to buy a $100,000 home, your loan-to-value is 80% because you borrowed 80% of the home’s worth.

What is 70% Loan-To-Value?

A loan-to-value (LTV) ratio of 70% (0.70) shows that the amount borrowed is equivalent to 70% of the asset’s value. In the case of a mortgage, it means that the borrower has put down 30% and is financing the balance.

What is 80% Loan-To-Value?

It is given as a percentage. If you borrow $80,000 to buy a $100,000 home, your loan-to-value is 80% because you borrowed 80% of the home’s worth.

How is the Loan-To-Value Ratio Calculated?

To calculate your loan to value ratio, divide your existing loan balance (found on your monthly bill or online account) by the appraised worth of your house. To convert this value to a percentage, multiply it by 100.

What is the Lowest LTV?

Most lenders consider 80% to be an acceptable loan-to-value (LTV) ratio. Anything less than this figure is preferable. Borrowing costs may increase or borrowers may be rejected loans if the LTV exceeds 80%.

What is a Bad LTV Ratio?

Anything less than 80% is considered a decent loan to value ratio. This signifies that the lender’s risk is low. Anything beyond 80%, on the other hand, is considered a terrible loan-to-value ratio because it is risky for the lender.

Is a 40% LTV Good?

A good loan-to-value ratio should be no more than 80% as a rule of thumb. Anything beyond 80% is called a high LTV, which means that borrowers may face increased borrowing rates, the requirement of private mortgage insurance, or loan denial. LTVs greater than 95% are frequently regarded as undesirable.

What Does Loan-To-Value 90% of 200000 Mean?

The “loan to value ratio” (LTV) compares the size of your mortgage loan to the home’s worth. For instance, if your house is worth $200,000 and you have a mortgage for $180,000, your LTV ratio is 90%, because the loan accounts for 90% of the total price.

What Does 100% Loan-To-Value Mean?

The VA loan requirements allow for 100% LTV, which implies no down payment is necessary.

In conclusion

In real estate, the loan-to-value ratio is an important calculation to understand. A percentage statistic that compares the worth of an appraised home that you want to buy to the loan amount that you want to borrow, it helps lenders determine when you’re a safe bet from a financing standpoint. In general, the smaller your LTV, the better off you’ll be when it comes to borrowing money.