What is a loan to value ratio?
Your loan to value ratio (LTV) is a number used by mortgage lenders to figure out how much money they can lend on a particular property based on the home’s appraised value. A lender will take their loan to value ratio and multiply it by the value of the house, which becomes the maximum amount they will lend on that property. For instance if a home was worth $200,000 and the lender used a loan to value ratio of 80%, then they would be willing to loan $160,000 on the home.
The loan to value a lender will use depends on several things:
- Type of property (residential, commercial)
- Use of the property (primary residence, vacation home, investment property)
- Credit score and credit history of the borrower
How does loan to value work?
For most residential mortgages, lenders would like to give new loans using an LTV of 80%, however, an LTV of 90% is the most common seen on the market today. A higher loan to value ratio is riskier for a lender because it means the borrower has less invested in the property. As such a lender is only willing to extend a loan with a higher LTV ratio to someone with better credit or someone willing to pay for mortgage insurance.
Despite mortgage lenders reluctance, there are many mortgages given at very high loan to value ratios. For instance, some FHA-backed loans have an LTV ratio of almost 97%, meaning the borrower only has to place a 3% down payment. However, this type of FHA loan comes with a steep up front mortgage insurance premium, monthly mortgage insurance payments, and requires a special type of home inspection.
How to calculate your loan to value ratio?
To find the original loan to value ratio that your lender used on your home, you’ll need to find out how much your home was appraised at when you purchased it. Then you’ll need to find out the original value of your mortgage. Once you’ve got those numbers, you can find your LTV ratio by dividing the original amount of your mortgage by the original value of your home. The resulting number is the loan to value ratio your lender used when evaluating your mortgage.
Using the above example:
For a home worth $200,000 with a $160,000 mortgage;
160,000/200,000 = 0.8, or 80%
If you want to find the loan to value ratio than a lender is using for a new purchase or for a refinance, you can simply ask your loan officer and they will be able to provide you with the highest LTV ratio their bank is willing to accept for a person with your credit profile.