Loan-To-Value Ratio: How Your LTV Affects Your Mortgage

Calculating Your Risk of Default by Factoring in the LTV Ratio

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The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of the asset. The LTV ratio is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage.

The risk of default is always the real driver of underwriting and, ultimately, lending approval decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases.

Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to obtain private mortgage insurance to protect from buyer default.

Calculating the Loan-To-Value Ratio 

The valuation of a property is typically determined by an appraiser. Typically, banks will utilize the lesser of the appraised value and purchase price.

Let’s break down some numbers first, then discuss how these loan-to-values fit into the mortgage lending landscape.

  • Purchase Scenario #1 - Appraisal is Good (more than the purchase price)

Purchase Price: $100,000

Appraised Value : $110,000

Down Payment: $20,000

Loan Amount: $80,000

Loan-to-value (LTV) = 80%

  • Purchase Scenario #2 - Appraisal is Low (less than its Purchase Price)

Purchase Price: $100,000

Appraised Value : $90,000

Down Payment: $20,000

Loan Amount: $80,000

Loan-to-value (LTV) = 89%

  • Refinance Scenario #1 (standard, with no 2nd mortgage)

Home value: $100,000

Loan balance: $80,000

Equity: $20,000

Loan-to-value or LTV = 80%

  • Refinance Scenario #2 (multiple mortgage liens, including 2nd mortgage)

Home value: $100,000

Loan balance: $80,000

Second loan balance : $10,000

Equity: $10,000

Loan-to-value or LTV =  90%

Whether you are buying or refinancing, your loan's loan-to-value is important because it helps to determine your mortgage rate and your loan eligibility.

High-LTV Loan Types

Loan-to-value is a key factor in your ability to get approved for a mortgage. In general, lenders prefer loans with low LTV because loans with low LTV represent less risk to the bank.

That said, there are a number of loan programs specifically geared toward homeowners with high LTVs. There are even some programs which ignore loan-to-value altogether.

Here is a brief review of the more common high-LTV loan types.

VA Loan : 100% Loan-to-Value

VA loans are loans guaranteed by the U.S. Department of Veterans Affairs. VA loan guidelines allow for 100% LTV, which means that no downpayment is required for most VA borrowers. Always check with your lender first to ensure your VA eligibility is still in place for 100% financing.

VA mortgages are available to certain active-duty soldiers, veterans, military spouses, members of the Selected Reserve and National Guard, military cadets and Department of Defense employees.

USDA Loan : 100% Loan-to-Value

USDA loans are loans insured by the U.S. Department of Agriculture. USDA loans allow for 100% LTV — there is no down payment required.

USDA loans are sometimes known as Rural Housing Loans, but some suburbanites in smaller communities or on the far outskirts of metro areas can also qualify. Check with your lender.

FHA Mortgages : 96.5% Loan-to-Value

FHA mortgage guidelines require a down payment of at least 3.5 percent.

Unlike VA and USDA loans, FHA loans are not limited by military background or location — there are no special eligibility requirements and you do NOT need to be a first-time homebuyer.

If you have average credit, limited assets or are just getting started on your career path, a FHA mortgage might be the best path for you.

Fannie Mae & Freddie Mac Loans : 95% Loan-to-value (97% possible)

Conventional loans are loans guaranteed by Fannie Mae or Freddie Mac. Both groups offer 97% LTV purchase mortgages, which means you will need to make a downpayment of 3 percent to qualify. However, 95% or less loan-to-values are far more common.

As compared to an FHA loan, conventional financing is advised for homeowners with solid, established credit scores.

"No Appraisal" Refinance Programs

Homeowners looking to save money on their mortgage need to understand how loan-to-value comes into play. A higher loan-to-value from a lower than expected appraisal can nuke your savings quickly.

That said, multiple "no appraisal" refinance programs are available to select homeowners. Not only does the lack of appraisal quicken the underwriting process, it also makes loan-to-value irrelevant for those borrowers.

A few of those programs are highlighted below.

FHA Streamline Refinance

The FHA Streamline Refinance is a special refinance program made available to homeowners with existing FHA mortgages.

Official guidelines for the FHA Streamline Refinance waive appraisal requirements, which means that loans with unlimited LTV are allowed.

VA Streamline Refinance

The VA Streamline Refinance is a special refinance program for homeowners with existing VA home loans.

The official name of the VA Streamline Refinance is the Interest Rate Reduction Refinance Loan (IRRRL). Similar to the FHA Streamline, the VA Streamline Refinance does not require an appraisal, nor does it require the verification of income, employment or credit for most borrowers.

USDA Streamline Refinance

The USDA Streamline Refinance is available to homeowners with existing USDA mortgages only. Like the FHA and VA streamline programs, the USDA refinance waives the need for a home appraisal. The program is currently in pilot phase and available in 19 states.

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