LTV (Loan to Value) Ratio

The LTV ratio is a common number that is used in calculating mortgage loan eligibility. In fact, the loan to value ratio is one of the most important things that a lender is going to look at before approving you for a mortgage. Here are the basics of LTV and how it works.

Loan-to-Value Ratio

The loan-to-value ratio is a number that lenders use to compare how much the property is worth to the loan value against it. They are going to look at how much money is owed against a property and how much money that property is actually worth. By comparing these two numbers against each other, they can accurately gauge the amount of risk that will be involved with doing a loan. The lower the loan-to-value ratio, the more the lender is going to like the loan. This means that if you need to borrow significantly less money than what a property is worth, your odds of getting approved increase dramatically.

Calculation

Calculating the loan-to-value ratio of a mortgage is very simple. In order to calculate this, you will only need to know the value of the property, as determined by an appraisal, and how much money will be borrowed with the loan. Take the amount of money that is being requested for the loan and divide that number by the value of the property. For example, let's say that you want to borrow $80,000 and use that money to purchase a $100,000 home. In this case, you would take $80,000 and divide that by $100,000. Your loan-to-value ratio would be 80%. 

Typical Ratios

The loan-to-value ratio will vary greatly from one lender to the next. There are certain government programs out there that will actually provide you with a 100% LTV. However, they are so popular that funding tends to be backed up with these types of loans. Many lenders require a loan-to-value ratio of 80% in order to do a loan. This means that you will have to come up with 20% of the purchase price of the property on your own. Other lenders will provide loan-to-value ratios of as much as 95%. Even though these loans might be attractive because they allow you to come up with a lower down payment, you should keep in mind that you will have to pay private mortgage insurance with them. Anything greater than an 80% LTV is going to require you to pay private mortgage insurance. This can add somewhere between $50 and $100 to the monthly mortgage payment.

Value Not Price

Keep in mind that the LTV is calculated based on the value of the home and not the purchase price. This means that if you can get a good deal on the price of a home, this will significantly lower the loan-to-value ratio of the deal. In many cases, this is a popular way to avoid private mortgage insurance.

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