What is Loan-to-Value Ratio?

Your loan-to-value (LTV) ratio is one of the many factors a mortgage lender considers when evaluating your loan application. Put simply, it’s a percentage that reflects the size of your mortgage as a total share of your home’s value.

How is loan-to-value ratio calculated?

Here’s how LTV ratio is calculated: 

[TOTAL LOAN BALANCE] / [HOME VALUE] x [100] = LTV%

Why is LTV important?

For lenders, the loan-to-value ratio is one factor that might play into the risk that the mortgage represents. A higher LTV means the lender may have to put more money on the line. It could also mean a higher chance of loss if you fall behind on mortgage payments.

Lower LTVs lessen the risk for lenders because there’s usually a smaller chance of financial losses should you default on the loan. As such, borrowers with lower LTVs generally get more favorable loan terms — including lower interest rates.

What are LTV requirements?

Every mortgage product has different loan-to-value requirements. On USDA and VA loans, you can actually have up to a 100% LTV, meaning the lender finances the entire home purchase — no down payment required.

On conventional loans, your LTV must be 97% or lower, and on FHA loans, it’s 96.5% or lower (as long as you have a 640 credit score or higher).

How do you lower your loan-to-value ratio?

If you’re not happy with the interest rate or terms you’ve been quoted on a loan, taking steps to lower your LTV may help. 

You can do this by:

• Making a larger down payment. The more you put down out of your pocket, the lower your loan balance and LTV will be.

• Buying a lower-priced home. You can consider a lower-priced home. This allows your down payment to go further, and it lowers your loan balance and LTV as well.

The lower your LTV, the better terms and rates you may qualify for. That could mean serious financial savings over time (especially if you’re in the home a while). 

What’s your LTV?

Do you need help calculating what your LTV might be?

Want to better understand what that LTV means for your short- and long-term mortgage costs?

Get in touch with an Embrace Home Loans team member today.