You already know that lenders review your finances when you apply for a mortgage. That’s why you submit the loan application, providing a complete picture of your financial situation. This allows the lender to assess the risk of the loan, making sure that you can reliably make the monthly mortgage payments.
It gets a little more complicated when you dig into all the things your lender has to review, many of them required based on the type of loan program you’re using to finance your home.
One calculation that pops up in many loan programs’ requirements is a threshold for the loan-to-value (LTV) ratio. We will explain what the LTV ratio measures, why it’s important, and how it can impact your loan and monthly payments.
What is the Loan-to-Value (LTV) Ratio?
The loan-to-value ratio is an assessment of how much money you’re borrowing compared to how much the property is worth. This is commonly expressed as the mortgage or loan amount (MA) divided by the appraised property value (APV).
To give you an example of how LTV ratios are used in the mortgage approval process, we can calculate one together. Let’s say you are purchasing a home that appraises at $500,000. If you take out a mortgage for $425,000, you’ll divide $425,000 into $500,000, giving you an LTV ratio of 85%. This percentage is what loan programs are referring to when they list LTV ratio requirements.
How LTV Ratios Impact Your Mortgage
Your LTV ratio is just one factor in the loan approval process. Lenders also review your credit score, payment history and reliability, your income, assets, and more.
But your LTV ratio is important to understand because it can have an impact on your interest rate and monthly mortgage payment. Loan programs usually have thresholds that trigger higher interest rates when your LTV ratio surpasses a certain percentage.
In addition to interest rate implications, LTV ratios above 80% typically result in you having to purchase private mortgage insurance (PMI), which is rolled into your monthly payment. So, while a higher LTV ratio doesn’t necessarily mean you won’t qualify for your loan, it can mean that you’ll end up paying more in interest and PMI over the life of the mortgage. If your sales price is higher than your loan amount so that you can meet LTV ratio requirements, that difference has to be paid in cash at closing as part of your down payment.
LTV Ratio Requirements for Common Loan Programs
Now that you know how to calculate your LTV ratio and how it can impact your homeownership costs, the next step is understanding the LTV requirements of common loan programs.
This will help you budget for your next home and get a rough estimate of how much you should expect to pay as a down payment.
- FHA loans allow for LTV ratios up to 96.5%, with down payments as low as 3.5%.
- VA (Veterans Affairs) loans allow buyers to finance up to a 100% LTV ratio, meaning there are options that require no down payment.
- Most conventional loan programs allow you to qualify with up to a 97% LTV ratio.
What’s a Good LTV Ratio Range?
As you’ve learned, this simple calculation can play a big role in determining what loan program you can qualify for and how much you’ll pay for the cost of your loan.
With the variety of loan programs out there, you might wonder how you can decide what a good LTV ratio will be for you and how much you should expect to put as a down payment.
That answer will be different for everyone. You have to take into account your personal financial goals and your budget. In general, you can save on the interest rate and other loan costs if your LTV ratio is 80% or lower, but that doesn’t mean that will be the best option for every buyer.
The best way to figure out the right LTV ratio range for you is to review your loan options holistically, comparing the requirements of the different loan programs you can qualify for and the financial impact of each of them.
The best way to know which loan options you can qualify for and the advantages of each of them is through a free, no-obligation consultation with our team.
Our loan officers get to know each client and really understand your financial goals. This allows them to make personalized recommendations that support your homeownership goals, while also taking into account any other financial goals you’re working towards.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 04/14/2022.