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- 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 (LTV)
When you are purchasing a home or refinancing your current mortgage, you will come across a term called the loan to value ratio(LTV). It is one of the crucial parameters when it comes to financing.
The lenders would look at this parameter as one of the significant qualifying components. Let’s break it down and understand this phenomenon from a lender’s perspective.
What is a loan to value ratio?
LTV is a ratio to know how much money you are borrowing against the collateral.
When you are purchasing a home or refinancing it, you will come across the term LTV ratio through your loan officer.
Other than your credit score and income, your loan officer will also consider the Loan to value ratio to qualify your mortgage.
For example: if you are purchasing a home and you are willing to put a 20% down payment, your LTV is 80%. For a typical conventional loan, the LTV considered is up to 80%.
Lower the LTV better are the terms of the loan that you can qualify for.
Below is an example of how to calculate the loan to value ratio.
Why is LTV Important?
Why is LTV so important? What does it mean to a borrower? What does it mean to a lender? And what is a good LTV?
Lower the LTV lower is the cost of the loan to the borrower because when the LTV is low, the risk perceived by the lender is lower.
And when the LTV is high, the risk is higher for the lender. Your loan to value ratio could be a deciding factor for the lender to know which program is best suited for you.
Benefits of Lower LTV
When it comes to a new home purchase, it is always suggested to put as much as the down payment you can.
The upside of doing that is it would help you to lower your costs and fetch you a better interest rate on your mortgage. The second benefit is, if your LTV is low, this means you have good home equity.
Your home equity is your money in the house, and you can use it whenever you require cash.
Another advantage of having a lower loan to value ratio is the possibility of you avoiding the private mortgage insurance (PMI) in your monthly payments.
LTV Restrictions Based On Loan Programs
Every mortgage program, whether conventional, FHA, VA, or USDA all have certain LTV restrictions based on the type of transaction.
Conventional loan programs can go up to 97% loan to value ratio on a purchase transaction based on property type and occupancy.
The catch is if your LTV is going above 80% you will have to pay private mortgage insurance (PMI) in addition to your monthly mortgage payments.
FHA can go up to 96.5% LTV for a purchase transaction provided you meet the parameters set by the FHA guidelines.
VA offers 100% financing on the purchase transaction. USDA loan can go up to 100% LTV as well based on your qualifications and the guidelines set by the USDA department for a purchase transaction.
Conclusion
LTV is a significant financial metrics that are significantly relied upon by lenders to make their decision to lend you money and the type of program you qualify for.
On average, the LTV when it comes to new property purchases generally ranges between 60 to 80%.
Any loan to value ratio below 75% can be considered reasonable and risk-free by the lenders.
The amount of money you are putting as a down payment may help the lender to analyze, which loan program suits you the most?
A proper loan officer will always suggest multiple options with the benefits of the programs to help you make an informed decision.
