If you’ve ever been in the market for a mortgage, you’ve probably heard the phrase ‘loan-to-value ratio’ or ‘LTV’ for short. Obtaining a new mortgage can be nerve-wracking, even without the financial jargon and acronyms—so let’s talk about LTV, what it means, and how it affects you and your mortgage.
How are Loan-to-Value ratios calculated?
The Loan-to-Value Ratio is essentially the financed amount divided by the home’s value or purchase price, expressed as a percentage. Let’s say for example that you’ve found a home you’d like to purchase for $200,000 with a down payment of 20% ($40,000). You would be financing $160,000 of the $200,000 purchase price, which gives you a loan-to-value ratio of 80%.
Why are Loan-to-Value ratios important?
Now that you know what LTV means, let’s talk about why it is important. The higher your LTV, the greater ‘risk’ you are to your lender. This, among other factors, determines the interest rate your lender will offer you. You may be thinking ‘What if I don’t have 20% to put down? What other options do I have?’ Well, I’m glad you asked! There are many loan programs available today; each with benefits, and its own unique set of guidelines.
- Conventional loans require, at a minimum, a 3% down payment. Our new 1% down option, however, allows the borrower to put only 1% down and we contribute the other 2%, leaving the borrower with 3% equity and a 97% LTV.
- FHA loans require, at a minimum, a 3.5% down payment. The interest rates are typically higher on FHA than on Conventional, but are more forgiving of borrowers with lower credit or bankruptcy/foreclosure in the past.
- VA loans and USDA loans are zero down programs, but require that the borrower be a US Veteran (for VA loans) or that the home be located in an eligible, rural area (for USDA loans).
Generally, the greater the down payment you are able to provide, the lower your LTV will be; the lower your LTV, the better loan terms you will receive. The most significant rate changes happen in increments of 5%, and when you reach an 80% LTV.
Still unsure? Have a specific scenario you’d like to run past us? Give us a call to speak with one of our licensed loan officers. We would love to recommend the best loan program for you and your situation.
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