Loan-to-value ratio (or "LTV") is a percentage calculated by dividing the dollar amount of the mortgage loan by the value of the home securing the loan.
Freedom Mortgage uses LTV to help determine whether you qualify for a loan. For example, some mortgages have a maximum loan-to-value ratio of 80%. This means your LTV can be no greater than 80% if you want to qualify for that loan.
We also use LTV to help decide what interest rate and other terms we may offer. As a result, your loan-to-value ratio can affect whether you get a mortgage and how much you pay for it.
How to calculate loan-to-value ratio
When we calculate LTV, we use the appraised value of the home to estimate the home's value. The appraised value is not always the same as its purchase price, which is important to understand when you are buying a home.
For example, let's say you want to buy a home for $200,000 and make a down payment of $40,000. This means you will need a mortgage for $160,000. Take the mortgage amount and divide it by the sale price to get the loan-to-value ratio. That is …
$160,000 ÷ $200,000 = .08 or 80%
However, let's say your appraisal states the home is worth only $190,000. That means the loan-to-value calculation is now $160,000 ÷ $190,000 = 0.84 or 84%.
If your mortgage requires a maximum LTV of 80%, you may need to increase your down payment, re-negotiate the price with the seller, or take other steps to reduce your loan-to-value ratio.
Lenders like Freedom Mortgage may also look at your loan-to-value ratio when you refinance. We may need an appraisal to determine a home's current value or we may accept other estimates of how much it is worth.
Why loan-to-value ratio is important
LTV is used as a measure of a loan's risk. Customers with a lower LTV have more equity in their homes, are considered at less risk to default, and may qualify for lower interest rates or better terms.
Better mortgage choices are not the only way a lower loan-to-value ratio can save you money. LTV can also determine if you need to buy private mortgage insurance (PMI). If you make a down payment of less than 20% on a conventional loan, you will need to pay PMI. This insurance protects lenders against customers defaulting on their mortgages. PMI is added into your monthly mortgage payment.
Ways to buy a house with higher loan-to-value ratios
FHA loans are designed to help those with moderate incomes or less money for a down payment become homeowners. You may be able to buy a house with a down payment as low as 3.5% of the purchase price. There are limits on loan size and you will have to pay a mortgage insurance premium however.
Veterans, active duty service personnel, and surviving spouses may be able to buy a home with a 0% down payment if they qualify for a VA loan. The benefits of these loans include lower mortgage interest rates and no private mortgage insurance.
Freedom Mortgage is committed to helping Americans achieve the dream of homeownership. Would you like to speak to one of our loan specialists about your options? Then call 877-220-5533 or visit our Get Started page.