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HomeFinancingDown Payment AssistanceWhat is a mortgage's "loan to value"?

What is a mortgage’s “loan to value”?

LTV stands for “lifetime value,” but what exactly is it?

The LTV is a ratio of your mortgage debt to the value of your home. For example, if your home is worth $200,000 and you owe $180,000 on your mortgage, your loan-to-value ratio is 90%. Calculate your down payment based on your loan-to-value ratio (LTV). You’re borrowing 80% of the home’s value if you only put down 20%. In other words, your return on investment (ROI) is at 80%. One of the primary considerations for a lender is the loan-to-value ratio (LTV).

LTV for a new loan vs. an existing loan

Loan-to-value calculations are used in both purchasing and refinancing transactions. Lower assessed value, not the purchase price, determines the LTV. In a refinance, the loan-to-value ratio (LTV) is always calculated using an appraised value rather than the original purchase price. The maximum loan-to-value (LTV) determined by the lender determines how much equity you can withdraw from your home when using a cash-out refinance.

How to determine your LTV

You should figure out what percentage of the purchase price of your home you owe on the loan you have taken out. Using the purchase price, or the assessed value if you are refinancing, simply divide your loan amount by the loan amount. As a percentage, LTV is commonly used. Your LTV is 75 percent if your result is 0.75.

An example of a loan-to-value ratio

As an illustration of how a loan-to-value ratio for mortgages works, below are some instances.

LTV for a house that appraises higher

A home’s loan-to-value ratio is based on the purchase price rather than the appraisal when you buy it for more than it appraises for.

  • House price: $100,000
  • Appraised value : $110,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • 80,000 / 100,000 = 0.8
  • Loan-to-value: 80%

LTV for a property that appraises for less

Where the appraised value is less than the purchase price, the LTV is based on the appraised value. This increases the loan-to-value ratio.

  • House price: $100,000
  • Appraised value : $90,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • 80,000 / 90,000 = 0.89
  • Loan-to-value: 89%

Refinance LTV

Both purchases and refinances are treated equally when no second mortgage exists, such as a home equity loan or line of credit. The assessed value should always be used instead of the purchase price.

  • a $100,000 investment in your home
  • Amount Owed: $80,000
  • 20% of the property’s value, or $20,000, is in equity.

Definition of CLTV/HCLTV?

When refinancing with a second mortgage attached to the property, the loan-to-value calculation is different. Two new ratios must be taken into account:

  • Using the CLTV, your first and second mortgages are compared to the value of your home. In both loans and lines of credit, the CLTV is applicable.
  • HCLTV (High Combined Loan-to-Value) is a measure of your maximum loan to value (LTV), which includes any unused second mortgage amount. When you have a HELOC, only HCLTV is available to you (HELOC)

Refinancing with a HELOC

Calculating CLTV is easy. Calculate the difference between your first and second mortgage amounts. See how LTV varies from CLTV below.

  • Home value: $100,000
  • Loan balance: $80,000
  • Second loan balance : $10,000
  • Equity: $10,000
  • 80,000 / 100,000 = 0.8
  • Loan-to-value: 80%
  • (80,000 + 10,000) / 100,000 = 0.9
  • CLTV: 90%

Refinancing with a HELOC

Lenders will include your whole second mortgage when calculating your LTV when you refinance with a home equity line of credit. As a result, you have three measurements of loan to value. In addition to the conventional LTV, there is the CLTV, which combines the first and second mortgages, and the HCLTV, which examines the whole first and second mortgage total, independent of the withdrawal.

  • Home value: $200,000
  • Loan balance: $100,000
  • Available second loan balance: $80,000
  • Amount of second loan drawn out: $40,000
  • Equity: $20,000
  • 100,000 / 200,000 = 0.5
  • Loan-to-Value: 50%
  • (100,000 + 40,000) / 200,000 = 0.7
  • CLTV: 70%
  • (100,000 + 80,000) / 200,000 = 0.9
  • HCLTV: 90%

In both purchases and refinances, the loan-to-value ratio is critical since it influences your interest rate and your ability to get a loan.

WHY IS LTV IMPORTANT IN REAL

When buying or refinancing a property, LTV determines how hazardous the loan is. Lenders are wary of borrowers who borrow more than their property is worth. Because if you fail on the loan, they lose more money. The maximum LTV is required for all mortgages. The maximum loan to value is also down payment. For example, the popular FHA loan program requires just 3.5 percent down. With a 3.5 percent down payment, the maximum loan amount is 96.5 percent of the house price.

What is a good LTV?

A loan-to-value ratio of 80% is beneficial for lenders since it reduces their risk of losing money if the borrower fails. That’s why purchasers with 20% down and an 80% LTV don’t have to pay mortgage insurance. Aiming for an LTV of 80% isn’t always practical. Because many purchasers cannot afford a 20% down payment. It all relies on your house purchase ambitions. 100% may be an excellent LTV for one individual. For another, 70% may be optimal.

Here are some ideas. Choose one of these mortgage plans with high LTV limits to save money on down payment and purchase property faster:

  • USDA loan — 100% LTV
  • VA loan — 100% LTV
  • Conventional 97 loan — 97% LTV
  • HomeReady & Home Possible — 97% LTV
  • FHA loan — 96.5% LTV 

Getting a lower LTV can help you save money on interest and reduce your total loan expenses. Conventional loans typically need a 10%-20% down payment.

High LTV mortgages

For homeowners with high loan-to-value (LTV) ratios, there are numerous lending options. Even the loan-to-value ratio is not taken into account by some algorithms. Loans with high loan-to-value ratios (LTVs) are common.

The VA has authorized a loan with an LTV of 100%.

VA loans are guaranteed by the VA. No down payment is required because VA loan requirements allow for a 100% loan-to-value ratio (LTV). The VA loan, on the other hand, is only available to a select group of homebuyers, such as veterans.

  • Active duty military personnel
  • Military spouses
  • Reserve or National Guard members cadets at the US Military Air Force or Coast Guard Academies
  • World War II merchant seamen
  • USPHS officers
  • NOAA officers

100% LTV is allowed on a USDA loan

USDA loans are backed by the USDA. The LTV on USDA loans is 100%, and there is no down payment. It is often called “Rural Housing.” USDA loans can be used in both rural and many suburban areas.

Up to 96.5 percent LTV on FHA loans

FHA loans are backed by the Federal Housing Administration (FHA) (HUD). FHA mortgage requirements demand a 3.5 percent downpayment. FHA loans are not limited by whether you are in the military or where you live like VA and USDA loans are. FHA loans are great for people whose credit isn’t the best.

Conventional loan: LTV of up to 97%

Fannie Mae or Freddie Mac will back loans that are made by banks. Both groups offer 97 percent LTV buy mortgages that require only a 3% down payment. Most mortgage companies offer 97 percent loans, but they usually require PMI. FHA loans are better than conventional loans up to 97 percent LTV if you have good credit. Most of the time, FHA loans are better.

High LTV refinancing

Mortgages with a high LTV are easier to refinance than to get. Americans can get services like “no appraisal” or “streamlined” refinancing from many government agencies.

Refinancing with FHA

The FHA Streamline Refinancing is a program for people who have an FHA mortgage and want to refinance. The FHA Streamline Refinance doesn’t need an appraisal, so your LTV doesn’t matter if the value of your home hasn’t gone up.

VA refinancing

The VA Streamline Refinancing program is a unique way for veterans to get a new loan. The VA Streamline Refinance Loan is its real name (IRRRL). A VA-to-VA loan is another name for it. The VA Streamline Refinance is different from the FHA in that it doesn’t need an appraisal or proof of income, job, or credit.

Refinancing by USDA

The USDA Streamline Refinance can only be used by people who already have a USDA mortgage. To be eligible for refinancing through the USDA, your house must be appraised. Now, the software is being tested in 19 states.

Refinance mortgage relief

There have been a lot of “mortgage relief refinance” plans meant to help people who were underwater on their mortgages. Having a mortgage that is more than what your home is worth. So your LTV is more than 100%. Let’s say you have a mortgage of $150,000 on a property that costs $150,000. But now your home is only worth $125,000. 120 percent is your new LTV. Most of the time, you can’t refinance if your LTV is over 100%. With a special mortgage relief program, you may be able to refinance a home that is underwater for less money.

Check to see if you can get a mortgage.

Loan-to-value is a way to compare how much you owe on your house to how much it is worth. Most mortgage financing is based on this simple formula. When you know your LTV, you can figure out which mortgages you can get and which lenders offer the best rates.

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