The size of your mortgage loan versus the value of your house is referred to as the “loan to value ratio” (LTV). For example, if your home is worth $200,000 and you owe $180,000 on your mortgage, your loan to value ratio is 90%, because the loan covers 90% of the entire cost.
The mortgage balance in relation to the property’s worth is known as the loan-to-value ratio. A percentage is used to represent it. The loan-to-value is 80% if you obtain a $80,000 mortgage to purchase a $100,000 house since you borrowed 80% of the house’s worth.
Loan To Value can also be thought of in terms of a down payment.
If you put down 20%, you’ll be borrowing 80% of the home’s worth. As a result, your loan-to-value ratio is 80%.
Loan To Value is one of the most important factors that a lender considers when considering whether or not to approve you for a home purchase or refinance.
On both purchase and refinance transactions, lenders employ loan–to–value estimates. However, the arithmetic used to calculate your Loan To Value varies depending on the loan’s purpose.
Loan To Value Calculations – How Its Done
Loan To Value is calculated based on the home’s sales price – unless the home appraises for less than the purchase price. When this happens, the Loan To Value of your home is calculated using the lower appraised value rather than the purchase price.
The Loan To Value for a refinance is always based on the appraised worth of your house, not the initial purchase price.
When employing a cash out refinance, the maximum loan to value (LTV) set by the lender will govern how much equity you can take out of your home.
When you apply for a house loan, your lender determines your loan-to-value ratio, or the amount it is financing you in relation to the item’s value.
The ratio has an impact on your interest rate and whether or not you are eligible for a mortgage in the first place. Unless you qualify for a VA or USDA loan, 97 percent is likely the most LTV that lenders will allow in today’s market.
What should you do if your loan-to-value (LTV) ratio is too high?
A high loan-to-value ratio is no longer as significant as it once was. As previously stated, some conventional loans, as well as FHA-backed loans, allow 97 percent LTVs, whereas USDA and VA loans are always provided with 100 percent LTVs. However, with a few exceptions, a greater LTV normally indicates a higher interest rate.
If you have a high loan-to-value ratio, here are some things to think about:
- Is it possible for you to put down a larger deposit? Saving money or enlisting the support of family members to make a higher down payment may not be the most enticing option, but you’ll almost certainly get better loan terms.
- Reduce the size of your ideal home. Buying fewer homes increases your down payment and lowers your LTV. It’s always possible to blow up a few walls and improve later.
- At the very least, you should be able to overcome the LTV hurdle of 80%. If your loan-to-value ratio (LTV) is less than 80%, mortgage insurance is normally required. If you’re on the verge of missing the 80 percent mark, strive to make up the gap. In the long run, you’ll save a lot of money.
