Loan-to-value ratio (or "LTV") is a percentage calculated by dividing your mortgage by the value of your home.
Freedom Mortgage uses LTV to help determine whether you qualify for a loan. For example, some mortgages require your LTV to be no greater than 80% if you want to qualify for that loan.
We also use loan-to-value ratio to measure a mortgage’s risk. Customers with lower LTVs have more equity in their homes, are considered less likely to default, and may qualify for lower rates or better terms when they buy or refinance a home. As a result, your loan-to-value ratio, plus other factors, 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 your home's appraised value. It’s important to understand the appraised value is not always the same as your purchase price.
For example, let's say you want to buy a home for $300,000 and make a down payment of $60,000. This means you will need a mortgage for $240,000. Take the mortgage amount and divide it by the sale price to get the loan-to-value ratio. That is:
$240,000 ÷ $300,000 = .08 or 80%
However, most mortgage companies require a home appraisal before they will approve your mortgage. Let's say your appraisal states the home is worth only $290,000. That means the loan-to-value calculation is now $240,000 ÷ $290,000 = 0.83 or 83%.
If your mortgage requires a maximum LTV of 80%, you may need to increase your down payment or re-negotiate the price with the seller.