The Loan-to-Value (LTV) Ratio: A Guide for Borrowers in California

The Loan-to-Value Ratio (LTV) is a mortgage term homebuyer and homeowners should become familiar with if they plan to apply for a home loan. Mortgage lenders will mention LTV often while explaining the mortgage qualification process and different loan 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 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%.

High LTV and Mortgage Insurance

A buyer’s down payment and loan-to-value ratio play a critical role in determining whether a borrower needs mortgage insurance (MI).

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.” Mortgage insurance associated with FHA loans is simply called “Mortgage Insurance.”

Down Payment Impacts LTV

As mentioned above, a buyer’s down payment directly impacts their LTV. A higher down payment results in a lower LTV. A lower down payment results in a higher LTV

For example, a buyer using a $100,000 down payment on a $500,000 home would have a LTV of 80%.

If that same borrower reduced their down payment to just 50,000, their LTV would increase to 90%.

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 typically required
  • FHA: a minimum down payment of 3.5% is required for all property types
  • VA: no down payment is required for qualified buyers

Loan-To-Value Ratio and Getting Pre-Approved

A buyer’s loan-to-value ratio can impact their approval for a loan. Buyers who have higher LTVs are associated with a larger risk to lenders. Lenders typically associate low LTVs with lower risks of mortgage default. Depending on the loan’s criteria, LTV can play a key role in determining if buyers will be approved or denied a mortgage loan.

If you have questions about your personal loan qualifications, please contact us. Our expert team of Mortgage Analysts are available 7 days a week by phone at 855-855-4491 and by email at [email protected].

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