Your loan-to-value is a figure that lenders use to assess your ability to pay back your mortgage. Your LTV ratio measures the size of your loan against the value of the home you’re buying. Here’s closer look at what an LTV ratio is and how to calculate it.
LTV Ratio Defined
Your LTV ratio is a figure that compares the amount you are trying to borrow against the appraised value of a home. Your LTV ratio is expressed as a percentage and represents the portion of the property that isn’t covered by your down payment.
Your LTV ratio is used by mortgage lenders to gauge how much risk you pose as a borrower. If you have a low LTV ratio, it suggests that you have the funds to comfortably afford your mortgage, which helps you secure a lower interest rate. A high LTV ratio suggests you pose more risk to the lender, which makes it harder to get approved for a home loan.
“When counseling my customers, especially first-time homebuyers, I tell them the bank wants to know how much skin you have in the game,” says Kristen Conti, broker-owner at Peacock Premier Properties in Englewood, Florida.
So, what’s a good LTV ratio? The lower the better, so it’s best to keep your LTV ratio at 80% or lower. If your LTV ratio is too high, lenders may require you to purchase private mortgage insurance or make a larger down payment.
“The ideal scenario is 20% down payment and an 80% LTV,” Conti says. “Unfortunately, most new or first-time homebuyers do not have this kind of down payment especially with the price escalations we have seen post COVID-19.”
How do I calculate my LTV ratio?
To calculate your LTV ratio, take your total loan amount and divide it by the appraised value of the property. Then, convert that number into a percentage.
So, if you’re trying to buy a home that’s appraised for $400,000 and your loan amount is $360,000, then your LTV ratio is 90%.
A 90% LTV ratio is considered high and can make it difficult to get approved for a mortgage with a lower interest rate. Review the table below to see how increasing the size of your down payment can help you reduce your LTV ratio:
LTV Ratios for a $400,000 Home
|Down Payment||Loan Amount||LTV Ratio|
How Can I Lower My LTV Ratio?
If your LTV is higher than 80%, then here are some steps to lower your LTV ratio:
- Save for a larger down payment. Increasing your down payment means you own more of the home, which reduces the amount you’ll need to borrow. Making a down payment of at least 20% can help you avoid paying PMI on a conventional loan. Of course, that’s easier said than done, as many homebuyers have already spent years saving up for a down payment. But if taking longer to save for a larger down payment can get you below the 80% LTV ratio threshold, you’ll save money in the long run.
- Look for more affordable homes. If you can’t afford a larger down payment, you can reduce the price range of homes you’re looking at. A $65,000 down payment on a $400,000 home will give you an LTV ratio of 85%. However, a $65,000 down payment on a $300,000 home will give you an LTV ratio of 78%.
What Factors Can Increase My LTV Ratio?
Be sure to watch out for the following factors that can increase your LTV ratio:
- Low home appraisal. If the home appraisal comes back lower than expected, then the amount you need to borrow is going to be a larger percentage of the home’s value. If you believe there was an error, you can dispute the home appraisal.
- Rolling closing costs into your loan. If you roll your closing costs into your mortgage, then you won’t have to pay as much upfront. However, this increases your LTV ratio because your total loan amount has increased.
Here are the answers to some frequently asked questions about LTV ratios.