Loan-to-value ratio is a number that compares the loan amount with the value of the property you’re buying, and it’s often expressed as a percentage.
LTV is short for loan-to-value and, put simply, is the size of your loan compared to the value of your property. A low LTV usually means lower risk to the lender (a better chance of getting a loan and a lower interest rate).
Here, your trusted mortgage company in Michigan shares more information about LTV:
What Does a Loan-to-Value Ratio Mean When Buying Real Estate?
Your LTV ratio will affect the type of loan that you’re able to qualify for and the interest rate that you’ll pay. A higher LTV ratio means more risk for the lender, so they may require a higher interest rate or a different loan type.
- Loan-to-Value Ratio Formula. The LTV ratio can be calculated by simply dividing the loan amount by the asset’s value. For instance, if you are taking out a loan to purchase a car valued at $20,000, and the loan amount is $10,000, the LTV ratio would be 0.5 (or 50%). Some lenders may have different LTV requirements for different types of assets and loans.
- Loan-to-Value Ratio Rules and Variations for Different Types of Mortgages. You may choose from various types of mortgages when purchasing a home. The maximum allowed LTV, and therefore the minimum down payment required, can change depending on the mortgage you’re getting:
- FHA Loans. The maximum loan-to-value ratio that the Federal Housing Administration will insure is 96.5%. This means that you may borrow up to 96.5% of the home’s purchase price as a loan. You will also have to pay a mortgage insurance premium (MIP), which you might have to continue paying even after your equity is above 20%.
- USDA and VA Loans. These particular types of loans are backed by the government, specifically the Department of Agriculture or the Department of Veterans Affairs, and they don’t require a down payment. This could make your loan-to-value ratio go as high as 100%.
- Conventional Loans. A conventional mortgage loan may require a lower loan-to-value (LTV) ratio than a government-backed program. If you want a conventional loan and do not want to pay mortgage insurance, you may need to put down at least 20% and have an LTV of 80% or lower. There are also conventional loans available with a maximum LTV of 95% to 97%, but they may require private mortgage insurance (PMI).
What’s a Good Loan-to-Value Ratio?
Generally speaking, the lower your LTV ratio, the better. That’s because a lower LTV ratio means you have more equity in your home, which gives you a better chance of weathering any financial storms that may come your way. Additionally, a lower LTV ratio may also lead to a lower interest rate on your mortgage.
Of course, there are some exceptions to every rule. If you’re a first-time homebuyer, you may be able to get a mortgage with a higher LTV ratio. And if you plan to put your home up for sale in the near future, a higher LTV ratio may not be a big deal.
At the end of the day, the best LTV ratio for you will depend on your unique financial situation. But if you want a general guideline, aim for an LTV ratio of 80% or below.
A loan’s LTV ratio is a way for lenders to compare the loan’s balance to the value of the collateral. The lower the LTV ratio, the easier it is to get a loan.
Contact Your Trusted Mortgage Broker in Rochester, MI
Mortgage companies in Michigan will also look at your credit history and credit scores to help them decide whether or not to give you a loan.
Ready to apply for a home loan? Ascend Mortgage is a reputable mortgage company in Michigan that can help you. Get in touch with us today at (248) 775-1275 to learn more about our home loan solutions!