The Loan-to-Value Ratio (LTV) is a key mortgage term for homebuyers and homeowners to know and understand. We mention LTV a lot when breaking down other mortgage topics and products. Today we’re giving a crash course in LTV and explaining the impact LTV has on purchasing and owning a home.
Loan-to-Value Ratio Defined
The loan-to-value ratio (LTV) is the percentage of a buyer’s debt (their mortgage loan) to the appraised value of their home.
LTV is calculated by dividing the mortgage amount by the total appraised value of the property.
For example, if a homeowner has a mortgage of $400,000 and the appraised value of their home is $500,000, then the LTV would be 80%.
Down Payment Impacts LTV
A buyer’s down payment amount directly impacts their LTV. A higher down payment results in a lower LTV. A lower down payment results in a higher LTV.
Down Payments for Different Loans
Some loan types have a minimum down payment requirement regardless of a buyer’s LTV:
- Conforming/ Conventional: a minimum down payment of 5% is usually required
- FHA: a minimum down payment of 3.5% is required for all property types
- VA: no down payment may be required for qualified buyers
High LTV and Mortgage Insurance
A buyer’s down payment and LTV play a critical role in determining whether mortgage insurance (MI) will be added to their loan. Borrowers are generally required to pay for mortgage insurance if their down payment is less than 20% of the purchase price or their LTV ratio is more than 80%. Mortgage Insurance for conventional loans is known as “Private Mortgage Insurance” (PMI). Mortgage insurance associated with FHA loans is simply called “Mortgage Insurance” (MI).
LTV and Getting Approved
A buyer’s LTV can impact their approval for a loan. Buyers who have higher LTVs are associated with a larger risk to lenders. Lenders view lower LTVs as having a smaller risk of default. Depending on the loan’s criteria, LTV can play a role in determining if buyers will be approved or not.
If you have questions about your personal loan qualifications, please contact us.