LTV stands for loan-to-value, or more commonly, loan-to-value ratio. The broad definition of LTV is a ratio of the total amount of a proposed loan to the value of the asset that it is financing. It is a of determining the risk to the lender, and it also allows the borrower to know whether or not the loan can be repaid in the event that they sell the asset.
LTV and Mortgage Insurance
When in the process of deciding on whether or not to approve a mortgage, lenders carefully assess the loan-to-value ratio. When an LTV is particularly high, the lender will require that the borrower purchase mortgage insurance. The borrower will make payments on the insurance along with their monthly mortgage payments, and when the LTV drops below a certain percentage, the borrower is no longer required to make the insurance payments. Conventional mortgages require the LTV to drop below 80%, and FHA loans have a requirement of 78%. LTVs of 80 % or lower allow lower rates for buyers who are considered low-risk, and they also make it easier for lenders to consider borrowers in the high risk category. Borrowers who are considered high risk may have a history of missed payments, minimal income documentation, or a high debt-to-income ratio.
Calculating Your LTV
Calculating a home’s LTV is quite simple. In layman’s terms, an LTV is the difference between the amount of a home loan and the home’s value. If a home has a total value of $150,000, and the loan needed is $135,000, the LTV would be 90%. Many homeowners in today’s economy would rather avoid making an extra PMI (private mortgage insurance) payment along with their mortgage payment, the reality is that this payment must be included until the LTV reaches the specified percentage. One way to lower the percentage at a faster rate is by making extra payments each month, commonly known in the mortgage world as overpayments. If a home increases in value, this could also lower the LTV, so it is always a good idea for borrowers to obtain a home appraisal if this occurs.
In today’s economy, many homeowners are considering refinancing. Typically, the homeowner will need to have an 80% LTV ratio in order to finance, and most lenders will allow for a maximum of 75 % LTV ratio for the new amount. However, in today’s home lending market, the Making Home Affordable program allows for homeowners looking to refinance to have an LTV ratio of 125 % as long as their conforming loans are owned by Freddie Mac or Fanny Mae.
While many prospective home buyers would prefer to pay for their homes outright and not have to worry about LTVs and PMI requirements, that is simply not the case for most people in today’s world. While the real estate market has had its ups and downs in the past few years, the good news is that many prospective buyers with less than perfect credit are now being considered when applying for a mortgage, allowing individuals with various income levels and credit scores the chance to start fresh in a new home.