LTV: What is Loan to Value Ratio?
September 14, 2022
Loan to value ratio or LTV is a term you may encounter while looking at your potential to qualify for a mortgage. When you are looking to buy a home, having some knowledge of the vocabulary can help you better understand your options.
Let answer a few common questions about loan to value ratio:
What is Loan to Value ratio?
A loan to value ratio, abbreviated LTV, is the percentage of the property value that a lender will grant as the loan amount. Qualifying home buyers can get a home loan for 80% to 97% of the property’s value in a conventional mortgage.
There are two factors in determining the loan amount for each mortgage loan. The appraised fair market value of the home and the maximum loan to value ratio for each mortgage program are used to calculate the loan amount for your mortgage. This means that the LTV for your home loan is specific to the individual property being purchased.
What are is maximum loan to value ratio for different mortgage programs?
Each type of mortgage has different qualification guidelines. The limitations on LTV, the loan to value ratio, are set at a maximum percentage of the homes appraised value. Below are the loan to value maximums for the most common conventional and government backed mortgage programs.
- Conventional Mortgage: 95% LTV Maximum
- First Time Home Buyer Conventional Mortgage: 97% LTV Maximum
- FHA Loan: 96.5% LTV Maximum
- VA Loan: 100% LTV Maximum
- USDA Loan: 100% LTV Maximum
- Jumbo Loan: 80% LTV Maximum
How does the loan to value ratio impact my down payment?
Because each loan has a maximum LTV limitation, home buyers are required to pay the remaining amount of the home purchase price that is over the LTV percentage. The examples below show the possibility of a down payment with an offer at or above the fair market value of a property.
Example Scenarios:
Fair Market Offer
If a home buyer offers to purchase a home from the seller at the fair market value of the home, their offer is at 100% of the value of the home. With a conventional mortgage, the home buyer will make a down payment of 5% of the home value. This means that the mortgage loan will cover 95% of the value of the home in the purchase transaction.
Looking at this scenario as an equation for a conventional mortgage:
(Offer is = 100% Property Value) - 95% LTV Maximum = 5% Down Payment of the Home Purchase Price
Elevated Value Offer
If a home buyer offers to purchase a home at a price that is higher than market value, the home buyer is responsible for paying the additional amount above the appraised value at closing. Because the LTV ratio is set at a maximum percentage of the market value, the loan amount can’t exceed the LTV for the specified mortgage program.
Looking at this scenario as an equation for a conventional mortgage:
(Offer is = 105% Property Value) - 95% LTV Maximum = 10% Down Payment of the Home Purchase Price
How is the fair market value of the property determined?
The home you are looking to purchase will be appraised by a licensed 3rd party appraiser as a part of the mortgage process. An in-person appraisal of the property will be conducted to assess the features, size, and condition of the home. Then the appraiser will compare the property to other nearby recently-sold properties to determine the market value of the home. The official appraisal report will be submitted to you and the mortgage lender, determining the property value that will be used to calculate the loan to value ratio for your mortgage.
Learn more about appraisals in the mortgage process in another helpful article.
What is the loan to value ratio for your potential mortgage?
Talking to a mortgage expert on our team is the best way to get a customized look at your best mortgage options. We can help you review the different mortgage programs and assist your in choosing which is a great fit for you.
Reach out to our team to talk about your goals and get pre-approved for a home loan. Pre approval is fast and FREE with Aspire Lending.
