Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About loan-to-value ratio & How to Calculate LTV
If you’re getting a home equity line of credit, the quantity of obtainable equity you’ve got in your home plays a crucial role.
The difference between the appraised value of your home and your current mortgage balance is known as your home equity.
The more equity you’ve got, the more financing options could also be available to you.
Your equity helps your lender determine your loan-to-value ratio (LTV), which is one of the factors your lender will consider when deciding whether or to not approve your application.
Today let us learn what is the loan to value (LTV) ratio and how to calculate LTV?
An assessment of lending risk that a lender examines before approving your mortgage loan is called the loan to value ratio.
It also helps your lender determine whether or not you’ll need to buy private mortgage insurance (PMI).
To avoid PMI, your LTV typically must be 80% or less, but PMI applies only to first liens so if your home equity line of credit may be a second lien against your house, you do not need to worry about paying PMI.
An LTV is often used to determine the amount necessary to put in down payment and if the lender will extend credit to you.
How to Calculate LTV?
Your loan-to-value ratio (LTV) is the way of expressing what proportion you continue to owe on your current mortgage. Here‘s the essential loan-to-value ratio formula:
When the Current loan balance is divided by the Current appraised value you get the LTV calculation
Example: You currently have a loan balance of $140,000 (you can find your loan balance on your monthly loan statement or online account). Your home currently appraises for $200,000. So your loan-to-value equation would appear as:
$140,000 ÷ $200,000 = .70
Convert .70 to a percentage which gives you a loan-to-value ratio of 70%.
Combined loan-to-value ratio (CLTV) for your loan
If you’re considering a home equity line of credit, you’d add the quantity you would like to borrow or the credit limit you would like to determine to your current mortgage balance.
This is to offer you your combined loan balance and your combined loan-to-value formula would appear in this format:
Current combined loan balance ÷ Current appraised value = CLTV
Example: You currently have a loan balance of $140,000 (you can find your loan balance on your monthly loan statement or online account) and you would like to take out a home equity line of credit of $25,000.
And if your home is currently appraised for $200,000. So your combined loan-to-value equation would appear as:
When you convert .825 to a percentage, it will give you a combined loan-to-value ratio of 82.5%.
Most lenders require your CLTV to be 85% or less for a home equity line of credit. If your CLTV is just too high, you’ll either pay down your current loan amount or wait to ascertain till your home’s value increases.
The Appraisal
A professional appraisal is an important part of determining your loan-to-value ratio. If an on-site appraisal is required, your lender will arrange for a licensed appraiser to return to your home and estimate its value.
You can contact your trusted lender to learn more about the house appraisal process.
How to Impact your LTV calculation?
One of the simplest ways to assist reduce your loan-to-value ratio is to pay down your home loan’s principal on a daily basis.
This happens over time just by making your monthly payments, assuming that they’re amortized (that is, support a payment schedule by which you’d repay your loan fully by the time of your loan term).
You’ll reduce your loan principal faster by paying a little bit more than your monthly amortized mortgage payment (ask your lender if you’ll need to pay prepayment penalties if you are doing this).
Different loan types may have different rules for LTV requirements
FHA Loans – Compare to a conventional loan FHA loans require a lower minimum down payment and credit score. An initial LTV ratio of up to 96.5% is allowed in an FHA loan.
But they also require a MIP which lasts for the life of the loan.
VA and USDA loans – These loans are available to current and former servicemen or those in rural areas, the LTV ratio can be as high as 100%, and they don’t require any mortgage insurance.
Home Ready and Home Possible mortgage programs of Fannie Mae and Freddie Mac which is a loan program for low-income borrowers allows an LTV ratio of 97%
Making smart improvements could positively affect an appraisal. It would be beneficial to you if you consult an appraiser or a real estate professional for advice before investing in any home improvements.
Bear in mind that the economic conditions can have a negative impact on home values no matter what improvements you create to your home.
Conclusion
Now that you know how to calculate your loan-to-value and combined loan-to-value ratios and the way you can impact them, you’ll make more informed choices to reach your financial goals, whether you decide to borrow from the equity in your home, refinance or just pay down any current home equity credit balances.
