If you’re hoping to become a homeowner, you’ve got a lot of numbers spinning in your brain: interest rates, closing costs, property taxes, and more. The lender who will review your mortgage application also has some numbers to consider. One of the key numbers is your loan-to-value ratio, or LTV.
what is the loan-to-value (ltv) ratio?
Loan-to-value ratio is the amount of money you borrow, also called loan principal, divided by the equity or value of the property you want to buy.
how to calculate a loan-to-value ratio
For example, if you plan to make a $50,000 down payment on a $500,000 property, and you borrow $450,000 for your mortgage, your LTV ratio ($450,000 divided by $500,000, multiplied by 100) would be 90 percent.
what is combined ltv?
if you already have a mortgage and want to apply for a second, your lender will assess the combined ltv (cltv) ratio, which takes into account all the loan balances on the property: the outstanding balance of the first mortgage, and now the second mortgage.
Let’s say you have a $250,000 outstanding balance on a home that’s appraised at $500,000 and you want to borrow $30,000 on a home equity line of credit (heloc) to pay for a kitchen renovation. here is a simple breakdown of the combined ltv ratio:
$280,000 ($250,000 + $30,000) / $500,000 = 56 percent cltv
If you have a heloc loan and want to apply for another loan, your lender might look into a similar formula called the combined home equity ltv ratio (hcltv). this figure represents the total amount of the heloc against the value of your home, not just what you have withdrawn from the line of credit.
ltv vs cltv
ltv and cltv are similar figures; Both describe how much equity you have in your home compared to how much you still owe on your mortgage. the difference is that the ltv takes into account only the first mortgage (the one you bought the house with), while the cltv takes into account your first mortgage and any subsequent mortgages, such as a heloc or home equity loan.
why lenders look at ltv
Before a bank or lender decides to approve your mortgage application, the lender’s underwriting department must be sure that you will be able to repay the loan. Understanding the full scope of the ltv ratio means more work to determine how you’ll be able to afford the “l” in the equation.
In addition to the LTV, lenders look at an initial ratio and an ending ratio to assess your finances.
The initial ratio is known as the “housing ratio,” and it divides the total monthly mortgage payment (principal, interest, taxes, and insurance, or piti) by your monthly income.
Let’s say your monthly mortgage payment is $1,500 and your monthly income is $6,000. your starting ratio, in that case, would be 25 percent.
However, your mortgage payment isn’t the only cost you’ll manage as a homeowner. do you have a car loan? Are you paying off college loans? Consider all the money you owe to other lenders for the final ratio, also known as your debt-to-income (DTI) ratio, which is your monthly mortgage payment plus all your other monthly debt obligations divided by your monthly income.
If your monthly mortgage payment is $1,500, your monthly income is $6,000, and your monthly debt obligations total $1,300, your back-end ratio or DTI would be 46 percent.
Between the LTV and the front-end and back-end ratios, if the lender thinks you’re at higher risk, you’re likely to pay a higher interest rate, which translates to paying more money over the life of the loan. of the loan.
what is a good ltv relationship?
The ideal LTV ratio varies depending on the lender’s requirements and the type of loan. However, for you as a borrower, a “good” LTV ratio could mean that you deposit more money and borrow less. In general, the lower your LTV ratio, the better: you’ll be less exposed to negative equity or going underwater on your mortgage, if home values were to drop significantly.
loan-to-value ratio by loan type
- conventional loan: the magic ltv ratio for most lenders is 80 percent. This means you can afford a 20 percent down payment and, as a borrower, you won’t have to pay for private mortgage insurance.
- fha loan: Generally, an LTV ratio of 96.5% will suffice to obtain an fha loan. Keep in mind that the 3.5 percent minimum down payment requirement for FHA loans means you’ll need to pay for mortgage insurance.
- va loan: If you are a service member or veteran, you can have a 100 percent ltv with a va loan (in other words, no down payment), as long as you meet other requirements for your approval.
- usda loan: available to low- and moderate-income homebuyers in rural areas, usa. uu. The Department of Agriculture also offers certain borrowers the ability to get approved at a 100 percent LTV ratio.
- Refinancing: If you’re considering refinancing your mortgage, most lenders will want to see an LTV ratio of 80 percent or less (at least 20 percent equity).
how to lower your ltv
reducing your ltv ratio can happen one of two ways: you can save more money to put a larger down payment on your dream property, or you can find a cheaper property.
If you find a $250,000 home, for example, instead of the $500,000 in the scenario above, a $50,000 down payment will give you an LTV rate of 80 percent, which can help eliminate the additional cost of mortgage insurance and put you much closer to paying off the loan from day one.
You can determine how much house you can afford using the bankrate calculator.