A Guide to Loan-to-Value Ratio
Whether you are a first-time homebuyer in Texas or are looking for a loan to finance an additional property; to qualify your loan request, the lender will consider various factors such as your employment history, income, credit history and down payment percentage. The lender will also calculate the loan-to-value ratio, a ratio between the loan amount and the home’s appraised value. Your loan-to-value ratio can have a significant impact on the mortgage rate, which is why it is important to know how the ratio is computed and what a high or low LTV means for you.
What is Loan To Value (LTV)?
Loan to value is exactly what it sounds like. It is the loan amount in relation to the value of the home, expressed as a percentage. So for example, if you have a home that is worth $100,000 but you owe $80,000 on your home the LTV is 80%. As it applies to purchasing a home, if you are purchasing a $250,000 home and putting down $25,000 as a down payment then your resulting LTV the lender will use in their calculation and analysis will be 90% ([$250,000 - $25,000] ÷ $250,000).
Borrowers with a low LTV have more equity in their home and represent less risk as compared to those with a higher LTV. Even if the borrower defaults, the lender stands a good chance of recovering a substantial percentage of the loan amount after foreclosing, and later selling the property. LTV is certainly not the only factor a lender considers when deciding whether to lend to a particular borrower. That said, in most cases applicants with a low LTV qualify for a lower mortgage rate.
Impact on Mortgage Insurance
If you have a conventional loan, you can avoid paying the PMI by making a downpayment of 20 percent, or more, of the homes value. Lenders offering FHA purchase loans accept an LTV of up to 96.5 percent, but the mortgage insurance varies based on LTV. If the LTV is greater than 90% the FHA mortgage insurance is never eliminated and lasts for the full mortgage term. If the LTV is less than 90% then the mortgage insurance will drop off after 11 years into the mortgage term. USDAloans allow up to 100% LTV (and even allow costs to be rolled into the mortgage to go above 100%), but does have an annual fee that is similar to mortgage insurance which lasts for the term of the loan, regardless of LTV. Lastly, VA loans also allow an LTV of 100 percent but does not have any mortgage insurance tied to the loan regardless of LTV.