What Is a Loan-to-Value Ratio?
According to the Consumer Financial Protection Bureau, a loan-to-value ratio, or LTV ratio, is an assessment that compares the amount of your loan to the appraised value of the property securing it. In simpler terms, it’s a measure of the share of the property’s worth that the lender provided.
Why Is an LTV Ratio Important?
Why does an LTV ratio matter? As Investopedia makes clear, there are two important reasons that borrowers need to be concerned about LTV ratios:
- Lenders consider LTV ratios when determining if a borrower is creditworthy enough to receive a home loan.
- Lenders use LTV ratios to decide how much of a down payment is required.
What Is a Good LTV Ratio?
When it comes to LTV ratios, the type of loan that you’re using is a major factor. Smart Asset explains:
- VA loans. With VA loans, there’s no down payment required for eligible borrowers. That means your LTV ratio can be up to 100 percent.
- USDA loans. USDA loans also offer 100-percent financing to borrowers who meet the requirements. As a result, borrowers can have LTV ratios of up to 100 percent.
- FHA loans. Eligible borrowers can qualify for an LTV up to 96.5 percent depending on certain credit factors.
- Conventional loans. If you’re using a conventional loan, you’ll want to aim for an LTV ratio of 80 percent or less, if possible. While this requires a hefty 20-percent down payment, it allows you to avoid private mortgage insurance, which can be a costly expense.
How Do You Calculate An LTV Ratio?
Clearly, it’s smart to have a good idea of what your LTV ratio is. How do you calculate it? If you don’t mind a little math, Experian offers the formula. First, divide the amount owed on the loan by the appraised value of your property. Then, multiply your answer by 100 to get a percentage. What if math isn’t your strong suit? You may prefer to leave the calculations to an online calculator like NerdWallet’s Loan-to Value Calculator.
How Can You Lower an LTV Ratio?
Are you concerned that a high LTV could interfere with your ability to reach your housing goals? As Credit Karma indicates, there are ways to lower your LTV ratio:
- Make a bigger down payment. When you have a high LTV ratio, a bigger down payment will bring it down. What if you’re unable to make a larger down payment? You may want to consider looking at other forms of financing or waiting a while before making your home purchase.
- Lower your purchase price. A high LTV ratio may be a sign that you’re straining your purchasing power. Consider looking for a property that is smaller, older, in need of work, or in a location that’s slightly less desirable. Compromising on your wishes may provide greater financial stability.
- Arrange for your home to be reappraised. Home values tend to rise over time. If you’ve been in your home for a few years and believe that its value has moved in a positive direction, consider having it appraised. Knowing the value of your home can help you evaluate the possibilities when you’re thinking about refinancing or taking out home equity loans.
Whether you are buying your first home or interested in refinancing, the team at PrimeLending Dallas is ready to help. Contact us today to discover how we can help.