Are you planning to buy a home but don’t know much about Loan-To-Value Ratio (LTV)? Don’t worry; you’re not alone. LTV ratio is a critical factor that lenders consider when evaluating your mortgage application. In this blog post, we’ll demystify LTV and provide you with all the information you need to secure the best mortgage deals.
What Is Loan-To-Value Ratio?
LTV ratio is the percentage of the property’s value that you borrow from a lender. For instance, if you want to buy a home worth $300,000 and you have a down payment of $60,000, your LTV ratio is 80%. Lenders use LTV ratio to determine the level of risk associated with a mortgage. A higher LTV ratio could lead to higher interest rates or the need for mortgage insurance.
How to Calculate Your Loan-To-Value Ratio
Calculating your LTV ratio is easy. Simply divide the loan amount by the property’s appraised value or purchase price, whichever is less. For instance, if you’re borrowing $240,000 to buy a home worth $300,000, your LTV ratio is 80%.
Difference Between LTV and Combined Loan-To-Value Ratio
Sometimes, a property may have multiple loans secured against it. In such cases, lenders use Combined Loan-To-Value Ratio (CLTV) instead of LTV ratio. CLTV is the total amount of all loans secured by the property divided by the property’s appraised value or purchase price, whichever is less.
How Lenders Use Loan-To-Value Ratio to Determine Mortgage Terms
Lenders use LTV ratio to determine the mortgage terms, such as interest rates, loan amount, and mortgage insurance requirements. A lower LTV ratio can lead to better mortgage terms. For instance, if you have an LTV ratio of less than 80%, you may not need to pay for mortgage insurance.
LTV Ratio Rules for FHA, VA, and USDA Loans
Different types of loans have different LTV ratio rules. For instance, FHA loans typically have a maximum LTV ratio of 96.5%, while VA loans have no maximum LTV ratio. It’s essential to understand the LTV ratio rules for the type of loan you’re applying for to secure the best mortgage deal.
Tips to Lower Your Loan-To-Value Ratio
There are several practical tips to help you lower your LTV ratio. For instance, making a higher down payment, improving your credit score, and negotiating a lower purchase price can all reduce your LTV ratio and improve your mortgage terms.
Conclusion
Loan-To-Value Ratio is a critical factor in securing favorable mortgage deals. By understanding LTV ratio, you can make informed decisions about your home financing and secure the best mortgage terms. Use the tips we’ve provided to lower your LTV ratio and increase your chances of owning your dream home.”
