What is loan-to-value (LTV) ratio in real estate?
Loan to value ratio in real estate pertains to mortgage loans. The loan-to-value ratio is a measurement of the risk lenders consider when finalizing and approving a mortgage.
This ratio is calculated by the mortgage lender during the mortgage loan application process and is used to assess lending risk. All mortgage lenders will look at the LTV before approving a mortgage loan. If the LTV is too high, the loan is considered high risk and the offered interest rate will be higher, or the loan will be denied.
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How to calculate the loan-to-value ratio
The LTV on a mortgage loan compares the amount of the loan to the value of the property. LTV = (the amount of the loan ÷ Appraised value of the property) × 100.
For example:
A loan amount of $200,000 ÷ an appraised home value of $400,000 x 100 = 50% LTV.
What's a good loan-to-value ratio?
Lenders may approve a mortgage with an LTV up to 95%, depending on the type of mortgage program, the borrower’s credit score, and the down payment amount. The higher the LTV, the more risk there is for the lender.
LTV ratio requirements
The LTV ratio requirement can change depending on the type of loan you apply for. Here’s how they compare:
Conventional loans. Conventional loans are not backed by a government agency, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture (USDA). The typical LTV for conventions loans is 80%.
Conventional Conforming loans. These are loans that conform to requirements of Fannie Mae or Freddie Mac, companies that provide backing for conforming loans. The Freddie Mac LTV is 95% for a 1-unit Primary Residence. The Fannie Mae LTV is up to 97% for first-time homebuyers. Other LTVs may be accepted for other types of mortgage loans.
FHA loans. The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), insures
FHA loans. HUD allows up to 95% LTV on an FHA first mortgage that does not exceed $417,000. Otherwise limited to 85% LTV.
VA loans. A maximum LTV of 100% is accepted for VA loans. For certain refinancing loans, the maximum loan is limited to 90% of the value of the property.
USDA loans. The loan to value ratio may exceed 100% of the appraised value when the upfront, guarantee fee is financed. Any excess difference between the appraised value and the sales price may be used to finance closing costs and eligible repairs.
Refinancing. For conforming mortgage loans, an LTV of 80% is accepted; however the actual LTV will depend on the mortgage program and whether the homeowner is getting a cash-out refinance.
Why is the loan-to-value ratio important?
An LTV ratio plays a substantial role in getting approved for a mortgage. While a high LTV ratio will not exclude borrowers from obtaining a loan, the interest rate may rise as the LTV ratio increases.
Indeed, if the LTV ratio is higher than 80%, the borrower may be required to purchase private mortgage insurance (PMI). PMI is required on all mortgage loans where the buyer is making a down payment of less than 20% of the purchase price.
How to lower your loan-to-value-ratio
Whether you’re shopping for a home and mortgage or preparing to, here are two key strategies for lowering your loan-to-value ratio.
Make a larger down payment. This will reduce the amount needed for the loan and therefore reduce the LTV.
Look for a more affordable home. A lower cost home will require a lower mortgage and therefore reduce the LTV. However, a lower priced home may also have a lower assessed value and the LTV could work out to be similar.
LTV vs. combined LTV: what's the difference?
LTV. The LTV on a mortgage loan compares the amount of the loan to the value of the property.
CLTV. The combined loan-to-value (CLTV) ratio is calculated when a homeowner is seeking a mortgage refinance or a home equity line of credit (HELOC). This is calculated by adding the amount of the current remaining mortgage to the borrower’s other debt amounts, to come up with the borrower’s total debt.
When you get
pre-approved for a new mortgage, or apply for a
refinance or
HELOC your loan representative will run the numbers to ensure that you can qualify for the loan you are seeking.
What other factors do lenders look at?
All mortgage lenders will take into consideration several financial factors, in addition to your LTV ratio, before approving a mortgage loan application.
Credit score. The higher your
credit score the better (lower) the interest rate you’ll be offered.
Down payment. when a homebuyer/borrower makes a down payment of less than 20% of the property’s purchase price, lenders require
Private Mortgage insurance (PMI) be paid.
Cash flow. Lenders will also ask to see proof of income.
Liquidity. This refers to the money that is not tied up in retirement accounts,
CDs, and places where the money is not easily accessible.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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