What Is Loan-to-Value (LTV) Ratio?
Before approving a mortgage, financial institutions and other lenders look at the loan-to-value (LTV) ratio to determine lending risk. Loans with high LTV ratios are typically considered higher risk loans. As a result, if the loan is authorized, the interest rate will be greater.
A loan with a high LTV ratio may also require the borrower to acquire mortgage insurance to mitigate the lender’s risk. Private mortgage insurance is the name for this sort of coverage (PMI).
Loan-to-Value Ratio DefinitionLenders use the loan-to-value (LTV) ratio to indicate the proportion of a loan to the value of an item purchased.Banks and building societies typically use the phrase to express the ratio of the first mortgage line as a percentage of the overall appraised value of real property in real estate.
Loan-to-Value Ratio in the United StatesConforming loans in the United States are limited to an LTV ratio of less than or equal to 80% if they fulfil Fannie Mae and Freddie Mac underwriting requirements. Conforming loans exceeding 80% are permitted, however they usually require private mortgage insurance. There are other loans with LTVs greater than 80%. Purchase loans are insured to 96.5 percent by the Federal Housing Administration (FHA), while purchase loans are guaranteed to 100 percent by the US Departments of Veterans Affairs and Agriculture.
Why is Loan-to-Value Ratio Important?When lenders screen borrowers for a mortgage, one of the primary risk indicators they consider is loan to value. The risk of default is always there in lending decisions, and the possibility of a lender sustaining a loss grows as equity declines. As a result, the qualification standards for many mortgage programs become significantly stricter as the loan’s LTV ratio grows. Lenders might force borrowers with high LTV loans to purchase mortgage insurance to protect them from default, which raises the mortgage expenses.Bad LTV ratios (under 80%) may result in reduced rates for lower-risk borrowers while allowing lenders to consider higher-risk customers with low credit ratings, a history of late payments, high debt-to-income ratios, large loan amounts or cash-out obligations, insufficient reserves, and/or no income.
Loan-to-Value Ratio Mortgage CalculatorThe loan-to-value (LTV) ratio is the amount of a loan divided by the value of the item you’re buying. LTV is a term used in the mortgage industry to describe the ratio of your mortgage amount to the value of the home you are financing. Use our Mortgage Calculators for Florida to calculate your monthly mortgage payments after you have established your LTV ratio. Your LTV ratio is crucial since it can determine whether you need mortgage insurance and alter your mortgage rates.
Loan-to-Value Ratio SummaryIn general, the smaller the LTV ratio, the better the chances of getting the loan approved and the cheaper the interest rate. Furthermore, as a borrower, you will be less likely to be compelled to acquire private mortgage insurance (PMI).
- The loan-to-value (LTV) ratio is commonly used in mortgage lending to evaluate how much of a down payment is required and if a lender will offer credit to a borrower.
- When the loan-to-value ratio is at or below 80%, most lenders provide the lowest possible interest rate to mortgage and home equity applicants.
- For low-income borrowers, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible mortgage programs offer an LTV ratio of 97 percent (3 percent down payment), although mortgage insurance is required until the ratio falls to 80 percent.
Last Updated on 09/13/2022 by Mark Does
Financial Consultant and Author