How Your Loan-to-Value Ratio Affects Your Mortgage

 Loan-to-Value Ratio The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of the asset. The LTV ratio is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage.

The risk of default is always the real driver of underwriting and, ultimately, lending approval decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases.

Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to obtain private mortgage insurance to protect from buyer default.

Calculating the Loan-To-Value Ratio

The valuation of a property is typically determined by an appraiser. Typically, banks will utilize the lesser of the appraised value and purchase price.

Let’s break down some numbers first, then discuss how these loan-to-values fit into the mortgage lending landscape.

  • Purchase Scenario #1 – Appraisal is Good (more than the purchase price)

Purchase Price: $100,000

Appraised Value : $110,000

Down Payment: $20,000

Loan Amount: $80,000

Loan-to-value (LTV) = 80%

  • Purchase Scenario #2 – Appraisal is Low (less than its Purchase Price)

Purchase Price: $100,000

Appraised Value : $90,000

Down Payment: $20,000

Loan Amount: $80,000

Loan-to-value (LTV) = 89%

  • Refinance Scenario #1 (standard, with no 2nd mortgage)

Home value: $100,000

Loan balance: $80,000

Equity: $20,000

Loan-to-value or LTV = 80%

  • Refinance Scenario #2 (multiple mortgage liens, including 2nd mortgage)

Home value: $100,000

Loan balance: $80,000

Second loan balance : $10,000

Equity: $10,000

Loan-to-value or LTV =  90%

Whether you are buying or refinancing, your loan’s loan-to-value is important because it helps to determine your mortgage rate and your loan eligibility.

What to Consider When Buying a Home.

Who You Choose Makes a Difference When Buying or Selling a Home
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