What is Loan-to-Value (LTV) and Why
is it Important?
By Chris Schneider, Vice President of Ruhl Mortgage
The loan-to-value (LTV) ratio is a metric lenders use to measure the amount of debt used to buy a home compared to the value of the home being purchased. LTV is important because lenders use it when considering whether to approve a loan and/or what terms to offer. The higher the LTV, the higher the risk for the lender – if the borrower defaults, the lender is less likely to be able to recoup their money by selling the house.
What is LTV?
The loan-to-value ratio is a simple formula.
(LOAN AMOUNT / HOME VALUE) * 100 = LTV%
EXAMPLE: ($80,000 LOAN / $100,000 HOME VALUE) * 100 = 80% LTV
Hint: This could also be considered in the reverse. For example, a borrower with 20% down payment has an LTV of 80%
Lenders can only approve loans up to certain ratios – if the ratio is too high, your loan may not be approved. Or you may have to purchase mortgage insurance (PMI), which protects you lender in case you default on the loan.
LTV Rules for Different Mortgage Types
Lenders require a maximum LTV of 80% for borrowers who want to avoid paying PMI. If borrowers are willing to buy mortgage insurance – and the lender approves – borrowers may be able to get up the 97% LTV.
These loans are designed to encourage homeownership amount borrowers who would have trouble affording a down payment for a conventional loan. The maximum LTV allowed under FHA is 96.5%.
These loans are designed for US military and veterans. Using VA loan programs, eligible borrowers can finance up to 100% of the home’s value. However, borrowers are still responsible for paying any fees and other costs at closing, that together with the purchase price, exceed the value of the home.
These loans are designed to help individuals in rural areas afford homeownership. Using the USDA’s home loan programs, home buyers can finance up to 100% of a home purchase. The USDA will often cover “excess expenses” (those that exceed the home’s value), including: appraisal fee, tax service fee, homeownership education, initial escrow contribution.