Most home buyers need to get a mortgage to buy a house. One of the factors they will need to consider is the Loan-To-Value (LTV) ratio of a home that tells buyers whether or not they’re about to pay more than they can afford.
The loan-to-value (LTV) ratio compares the amount of money you want to borrow to the appraised worth of the house you want to buy. Lenders use this comparison to estimate the risk level of a loan before choosing whether to approve or deny it. The LTV is also used to evaluate if mortgage insurance is required.
LTV isn’t too complicated, but it’s one of the things potential homeowners should be aware of before they decide to purchase a home. Homebuyers should also be mindful of the LTV ratio when shopping for homes to avoid any unpleasant surprises with mortgages.
This is also an important factor for home sellers to find out if their home is worth the selling price. A Loan-To-Value Ratio (LTV) is essential for sellers because it gives them an idea of the price range they can use before choosing a listing price for their property.
What Is a Loan-To-Value Ratio?
A loan-to-value ratio is a calculation that compares the amount of your mortgage to the property’s appraised worth—the lower your LTV ratio, the bigger the down payment you’ll need to make. Lenders may use the LTV to assess whether or not to lend to you and whether or not to obtain private mortgage insurance.
A loan-to-value ratio determines how much of a property you’ll own vs. how much you’ll owe on the loan you used to buy it. The loan-to-value ratio is used for various loans, including home and vehicle loans, as well as acquisitions and refinances.
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LTVs are part of a larger picture that includes the following elements:
- Your credit score
- The amount of money you have available to make monthly payments
- The property’s condition and quality while you’re buying it
With good credit, getting a loan with a higher LTV is easy. Your debt-to-income ratio, or your debt payments divided by your income, is one of the essential factors lenders consider in addition to your credit score. This is a quick way for them to determine how much of a new loan you can afford. Are you able to afford the additional monthly payments, or are you in over your head?
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What’s a Good Loan-To-Value Ratio?
Most lenders prefer to see an LTV ratio of roughly 80% for a mortgage. If you borrow more than 80% of the home’s worth, you’ll almost certainly need Private Mortgage Insurance (PMI) to provide your lender with some security. When your LTV falls below 80%, your lender will typically allow you to cancel the insurance.
If you obtain an FHA loan, you may only be required to make a 3% down payment, resulting in a 97% LTV ratio. This means mortgage insurance would be required, possibly for the whole term of your loan.
When you take out a home equity loan, you’re borrowing against the value of your property, which raises your LTV ratio. If the value of your home rises, your LTV decreases. The closer you can bring it to an acceptable percentage in the mortgage lending procedure, the better, but there are many other elements to consider when making a lending decision. Tips to make you more attractive in the eyes of lenders. https://showcaserealty.net/9-tips-to-improve-your-chances-of-getting-approved-for-a-home-loan/
What Does 60% LTV Mean?
The LTV ratio compares the size of your mortgage loan to the worth of your home. LTV can also be thought of in terms of a down payment. If you put down 20%, you’ll be borrowing 80% of the home’s worth. As a result, your loan-to-value ratio is 80%.
A mortgage with a maximum Loan-to-Value Ratio of 60% will likely have a lower interest rate. It’s worth saving a little extra to get a 40 percent deposit. With a 60 percent LTV, you’ll save thousands of dollars in interest and repayments throughout your mortgage.
How Do You Calculate Loan-To-Value Ratio?
You can quickly figure out your own LTV ratio on your own. The mortgage balance is divided by the appraised property value, and the result is presented as a percentage.
Let’s say you borrow $90,000 to buy a Charlotte, NC home for sale with an appraised value of $100,000. You make a down payment of $10,000. This leaves you with a 90 percent LTV ratio. You will have an LTV ratio of 80% if you put down $20,000 instead.
As a rule, the more money you get from a lender, the higher your LTV ratio will be and the more risk the lender has to take on.
How LTV Affects Your Ability to Get a Home Loan
To get accepted for a home loan, you should budget for a down payment of at least 20% of the home’s value, which would result in an LTV of no more than 80%. Your loan may not be granted if your LTV reaches 80%, or you may need to acquire mortgage insurance to get accepted.
LTV is also crucial because if you’re purchasing a home and the assessed value turns out to be significantly less than the purchase price, you may need to make a higher down payment to stay within your lender’s LTV limits.
For example, let’s say you own a $100,000 property you purchased five years ago. Your current LTV is 65 percent if you have a $65,000 mortgage with a $65,000 outstanding amount left to pay.
Is a Higher LTV Good or Bad?
LTV is significant because lenders use it to determine whether or not to grant a loan, and what terms to offer a borrower.
The higher the LTV, the greater the risk to the lender. If the borrower defaults, the lender will have more difficulty recouping their investment by selling the home.
What Is Maximum Loan-to-Value?
The maximum loan-to-value ratio is a loan’s size ratio to the property’s monetary value. The loan-to-value ratio indicates how much a home’s purchase price is financed. The higher the loan-to-value ratio, the more the purchase price is financed.
Limitations of LTV Ratios
LTV ratios are more of an assumption than a precise science. No set rule says you’ll get a loan if your LTV ratio reaches a certain percentage, but your chances of getting a loan will improve if it’s close to that.
Keep in mind that allowable LTV ratios vary based on the loan type. Auto loans can have higher loan-to-value ratios than home loans.
Final Thoughts
The LTV ratio isn’t the only thing a lender will consider before granting you a mortgage. Lenders also look at your credit score, the amount of money you’d have available to make monthly payments, and the condition of the property you’re seeking to buy.
If you have good credit, you’ll be able to secure loans with greater LTVs. If your LTV ratio is high, you may be turned down or face a higher interest rate. Mortgage insurance, which mitigates part of the lender’s risk, may also be required.
Let Nancy Braun of Showcase Realty, your trusted and best real estate agent in Charlotte, NC, help you to understand and improve your LTV ratio in no time.