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Understanding mortgage loan-to-value ratios

Many thinking of taking out their first mortgage have heard the phrase “loan-to-value” or “LTV.” With significant assets on the line, it is important for home buyers to understand this risk assessment tool. The Loan-to-Value ratio is often used to set the down payment for a home, as well as the interest rate offered by lenders

How is LTV calculated?

The formula for loan-to-value is straightforward. Divide the mortgage amount by the appraised property value, and you have your LTV. The resulting percentage helps determine your interest rate.

For example: If the home is valued at $100,000 and a buyer makes a $10,000 down payment, their LTV ratio is 90%.

The most important factors when calculating LTV are the sales price, the down payment, and the appraised value. Buyers can help reduce their LTV ratio by offering a larger down payment and negotiating for a lower purchase price.

How does my loan-to-value rate affect my mortgage?

Those whose loan-to-value ratio is at or below 80% are more likely to get the lowest interest rates. The rate also impacts whether borrowers require mortgage insurance. Underwriters use the LTV ratio to determine their risk, and sometimes a high LTV can cause someone to be unable to get a mortgage at all.

Do different types of loans allow for different LTV ratios?

Yes. For example, VA and USDA loans for veterans allow for LTV ratios of up to 100% without private mortgage insurance. FHA loans can have up to a 96.4% loan-to-value, although they do require insurance for any above 80%. In general, those with a ratio of 80% or less stand the best chance of getting their mortgage approved.

Although the LTV ratio is an important part of any mortgage application, the value is not out of a home buyer’s control. An experienced real estate attorney can help home buyers negotiate a more favorable sales price to keep LTV ratios down. 

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