Loan-to-Value ratio, or LTV ratio, is a key factor in determining your ability to qualify for a mortgage and how much home you can afford. The LTV ratio represents the amount of your mortgage divided by the fair market value of the property that you are buying or refinancing. For example, if you have a $400,000 mortgage on a property valued at $500,000, the loan-to-value ratio is 80% ($400,000 mortgage ÷ $500,000 property value = .80%).
When you apply for a mortgage, the lender uses the fair market value of the property according to the appraisal report to calculate your LTV ratio. This is one of the reasons why the appraisal report is important when you apply for a mortgage. If the appraised property value is lower than expected, your LTV ratio may be too high which can impact if your mortgage is approved. This is also one of the reasons why you should not overpay when you buy a home in addition to the obvious reason of not wasting money.
Loan-to-value ratio is inversely related to your down payment. The lower your down payment, the larger the mortgage you need to buy a home and the higher the LTV ratio. The higher your down payment, the smaller the mortgage you need to buy a home and the lower your LTV ratio. For example, if you make a down payment of 20%, the LTV ratio is 80% and if you make a down payment of 10%, the LTV ratio is 90%.
From a lender's perspective, the lower the LTV ratio, the better because a lower ratio means you have contributed more of your own money to purchase the property so the lender is better positioned to recover their loan in the event of an unfortunate outcome such as a foreclosure. In short, a lower LTV ratio means that the lender has more collateral or if you cannot repay your mortgage. This is why lenders apply LTV ratio limits when you apply for a mortgage -- they want to make sure they have sufficient financial protection if you default on your loan.
Lenders typically offer you their best loan terms -- their lowest mortgage rate and closing costs -- if the LTV ratio is less than a maximum limit, usually 80% (although this figure can be as high as 90% for selected lenders and loan programs). For example, a lender may quote you a 4.500% mortgage rate with an LTV ratio of 80% and a 4.625% rate with an LTV ratio of 90%. You should always be aware of how your LTV ratio impacts your mortgage rate. You may be able to lower your rate and your monthly payment and save a significant amount of money over your loan by increasing your down payment and reducing your LTV ratio.
Additionally, some lenders may not approve your loan if your LTV exceeds their limit. For example, if you want to buy a home priced at $100,000 and have $1,000 for a down payment, but the lender's maximum LTV ratio is 97%, you may not be able to qualify for the mortgage because a $1,000 down payment on a $100,000 home implies a 99% LTV ratio.
The LTV ratio guideline is also independent of what size mortgage you can afford based on your monthly income, debt payments, credit score and other factors. In the previous example, you may be able to afford the monthly payment on the $99,000 loan you need to purchase the home but if the LTV ratio is too high you are unlikely to qualify for the mortgage. In some cases, if your LTV ratio exceed the lender's limit -- usually above 80% -- you may have to pay a higher mortgage rate or private mortgage insurance (PMI), which is an additional ongoing monthly cost. Although most lenders apply maximum LTV ratios, there are several no and low down payment mortgage programs that allow home buyers to qualify for loans with LTV ratios as high as 97% or even 100%, which means you are able to buy a home with down payment ranging from 3% to zero.
Please note that lender LTV ratio limits vary by lender, loan amount, property type and especially mortgage program. For example, maximum LTV ratios are typically lower for jumbo loans, non-owner occupied mortgages for investment properties and loans for multifamily properties. This means you are required to make a larger down payment to qualify for these loan programs. Additionally, for certain low down payment mortgage programs, the maximum LTV ratio for an adjustable rate mortgage (ARM) is also lower.
The most important factor that determines your LTV ratio limit is ratio is the mortgage program you select. The table below outlines the maximum LTV ratio for several conventional and government-backed mortgage programs including several low down payment programs.
When you apply for a mortgage be sure to understand the LTV ratio guidelines based on your loan program and amount and property type. We recommend that you contact multiple lenders in the table below to determine their LTV ratio requirement. Shopping for your mortgage also enables you to find the loan and lender that best meet your needs.
The example below illustrates how the LTV ratio works for a home with a purchase price of $375,000. As the chart demonstrates, the greater your down payment , the lower your LTV ratio. Typically lenders offer their best mortgage rate when the LTV ratio is less than or equal to 80%, which means the borrower is making a down payment of at least 20% of the property purchase price, or $75,000 in this example.
Use our free mortgage quote form to compare no obligation loan proposals from top lenders in your area. Our quote form is free, easy-to-use and requires minimal personal information. Comparing mortgage quotes is the best way to save money on your loan.
“What is a loan-to-value ratio and how does it relate to my costs?” CFPB. Consumer Financial Protection Bureau, November 15 2019. Web.About the author