You’ll hear several industry terms when applying for a mortgage, and one such term might be “loan-to-value ratio.” Abbreviated LTV, this ratio is an important number viewed by lenders and mortgage companies that plays a major role in mortgage acceptance and mortgage refinancing situations.
At Altius Mortgage and our partners at Mortgage Ogden, we’ll explain LTV and how it impacts you for any of our home loan options. Here are some basics to understand on this term and why it’s important for you to know.
LTV Definition and Importance
As we noted above, LTV is a ratio being expressed. It covers the amount of the mortgage loan as a percentage of the home’s total value – that is, how does the amount you’re requesting for your loan compare to the actual, precise value of the home currently?
So why does this ratio matter? Well, to help lenders understand the kind of risk they’re taking when approving your mortgage. When your home’s LTV sits close to the appraised value, it will be a higher number that represents more risk; this is because if the loan goes into default, there’s limited equity built up to make up for this.
On the flip side, attaining a lower LTV can lower the risk to the lender and improve your acceptance speed. Lenders tend to prefer LTV rates at or below 80 percent – they will often lend to those with higher rates, but these groups will pay larger interest rates and may not qualify for the same kinds of programs.
LTV Calculation Format
Calculating LTV is very straightforward, and something you can do on your own. You simply take the amount you’re requesting from the lender, then divide this by the appraised value of the property that’s being used in your situation.
Now, there are a few additional factors to consider here. For instance, in cases where the home is appraised at a lower value than the purchase price being requested, the lower appraised value will be used. For refinancing, meanwhile, the LTV will be calculated based only on appraised value.
Lowering Your LTV
There’s only one major way to decrease your LTV ratio: By paying a larger down payment. The more you pay on the down payment, rather than saving these payments to be folded into the overall mortgage, the lower the amount that you need to borrow from the lender to cover the home cost. A home you’re looking at might have an appraised value of $200,000 and a sales price of $190,000, which would mean a 95% LTV ratio, but if you’re able to put $40,000 up for the down payment, the sales price category would drop to $150,000, changing your LTV ratio to 75%.
For more on loan-to-value ratio and why it’s important, or to learn about any of our mortgage loan options, speak to the staff at Altius Mortgage today.