Understanding Loan-To-Value (LTV) Ratio
Author: Woodsboro Bank
The loan-to-value (LTV) ratio is the estimated lending risk that a financial institution or other financier is willing to assume on a mortgage loan. The LTV ratio is estimated for the purpose of mortgage loan application and is calculated by dividing the loan amount by the property value, expressed as a percentage. The general rule is the lower the LTV ratio, the higher the probability an applicant’s mortgage financing request will be approved.
Review how an LTV ratio is used within the mortgage loan consideration process:
- The LTV ratio determines the down payment amount required for a lender to extend a loan to a borrower.
- A low LTV means lower interest rate assignment to a loan.
- The cost of mortgage financing rises with a higher LTV score.
- Federal government lending rules offer more flexible terms to LTV ratio mortgage loan applicant eligibility.
- Lenders typically require private mortgage insurance (PMI) until the loan principal reaches the 80 percent LTV level.
What is Loan-to-Value (LTV) Ratio?
Lenders evaluate the LTV ratio of home financing to the total value of the property, yet there are other things to consider as well. A lender determines the LTV ratio to evaluate the risk exposure they will incur from underwriting a mortgage financing agreement.
The three main factors that impact LTV ratio outcomes are 1) downpayment, 2) sales price, and 3) the appraised value of the property to be financed. By negotiating a lower sales price on a property in a real estate market where the appraised listing price is higher, with a substantial enough downpayment to meet the criteria for a lower LTV ratio, an applicant has a better chance of attaining a loan.
If a mortgage applicant’s request for a loan is the same amount of a property’s appraisal value, a higher than desirable LTV ratio will be the outcome. Additional PMI insurance costs may be applied by a lender making an exception to the standard LTV requirements with a borrower evidencing a sufficient income to debt ratio, or substantial enough income from an investment portfolio.
If the probability of loan default is estimated to be high due to the low equity value accumulation present within an owner’s property asset, foreclosure risk will appear higher. Most lenders will assume this scenario will make it difficult to profit from the outstanding mortgage balance at time of resale.
The <80 percent LTV Ratio Rule
The LTV guides interest rate assignment to mortgage financing agreements. An LTV ratio of .07 or 70 percent indicates the loan amount is equal to seventy percent of the total appraised value of the asset. The remaining 30 percent is equal to the borrower’s downpayment. Most lenders apply an LTV ratio 80 percent or less threshold for borrowers to secure the lowest possible market interest rate on mortgage financing agreements.
Applicants with an LTV ratio 80 percent or higher are usually required to purchase PMI, which increases the total financed amount by up to 1 percent annually. LTV ratio estimates of 95 percent or more, are generally considered unacceptable by lenders. An 80 percent LTV ratio or less is generally required by lenders for a borrower to avoid the additional cost of PMI. Exceptions are sometimes made for loan applicants with proportionally higher income and lower debt or those earning enough from an investment portfolio.
Government LTV Rules
Borrowers refinancing a property or seeking other loan assistance are still subject to LTV ratio assessment. The Federal Housing Administration (FHA) funds applicants with a higher LTV ratio. The Veterans Administration (VA) and U.S. Department of Agriculture (USDA) offer loans to former and current military employees, and those purchasing in rural areas. The FHA, VA, and USDA do not require PMI. Federal Fannie Mae and Freddie Mac lending programs for low-income borrowers, provide mortgage loans to applicants with an up to 97 percent LTV ratio, and interim PMI applies until it drops to 80 percent .
The CLTV Ratio
The combined loan-to-value (CLTV) ratio is a more comprehensive approach to risk valuation of all secured financing attached to a property. CLTV is a more universal method of estimating a borrower's ability to repay a mortgage loan agreement than LTV. CLTV ratio estimation measures the total risk correspondent with a borrower’s primary mortgage, as well as second mortgage, home equity loan, credit line, or lien debts. Applicants with CLTV ratios of more than 80 percent can often rely on a higher credit rating.
Apply for a Loan – Today!
Mortgage lenders use LTV ratio assessment to determine if a borrower is eligible for a loan. If buying a home, Woodsboro Bank can assist you in finding a mortgage loan. Get an LTV or CLTV ratio assessment to find out about your eligibility for mortgage loan financing. We offer adjustable rate, fixed rate, jumbo loan, FHA, VA, and alternative financing options. Schedule an appointment with a mortgage loan specialist.