What is the Loan-to-Value Ratio
And How Does It Work?
Your loan-to-value (LTV) ratio is one of the most important numbers in the mortgage approval process. It helps determine the loan amount, its type, and its terms. Let’s look at how this simple number plays a crucial role in home financing.
What is the loan-to-value ratio (LTV)?
A loan-to-value (LTV) ratio measures the relationship between your mortgage amount and your home’s value. It shows how much of the property you’re financing versus how much you already own through your down payment or equity.
For example, on a $400,000 home with a $40,000 down payment, your loan would be $360,000. This results in an LTV of 90%, meaning you finance 90% of the home’s value and hold 10% equity from the start.
Why is your LTV ratio important?
Mortgage professionals use your LTV to assess financial risk. A lower LTV signifies a larger ownership stake in the property, which positions you as a less risky borrower.
They also use LTV to tailor your loan terms, including rate, loan type, and insurance requirements. A lower LTV often leads to more favorable terms, potentially including a lower interest rate or even eliminating the need for mortgage insurance. Ultimately, a strong LTV is a key factor in reducing the overall cost of your mortgage.
APPLY NOW
How much can you save with a strong LTV?
These favorable terms can translate into significant, tangible savings in two key ways:
- A Lower Interest Rate. With a strong LTV, you could hypothetically secure a 0.5% lower interest rate. Using the $400,000 example above, say you get 6.5% instead of 7.0% on a $360,000 loan. That could save you about $122 per month – or more than $43,000 in interest over the life of the loan.
- Avoiding Mortgage Insurance. If you put down 20% instead of 10%, you lower your LTV to 80% and typically eliminate the need for private mortgage insurance (PMI). On a $400,000 home, PMI could cost $150 to $300 per month. Avoiding PMI could save you $1,800 to $3,600 annually, and those savings continue until you naturally build 20% equity.
What are the LTV requirements for different types of loans?
Loan-to-value requirements vary by mortgage type. Each loan program has its own guidelines. Here’s how they compare across common loan types:
- Conventional Loans. These mortgages – not backed by a government agency – commonly allow LTVs up to 97%. That means with a conventional loan, you could buy a home with as little as 3% down. With less than 20% down, however, you typically need to pay PMI until your LTV is at least 80%.
- FHA Loans. Backed by the U.S. government, FHA loans commonly require a minimum 3.5% down payment for borrowers with a credit score of 580 or higher – a 96.5% LTV. Borrowers with lower scores often need to put 10% down, a 90% LTV. Regardless of LTV, FHA loans require a mortgage insurance premium (MIP).
- VA Loans. For eligible service members, veterans, and surviving spouses, VA loans usually require no down payment, allowing for a 100% LTV.
- Jumbo Loans. For loan amounts that exceed conforming limits, jumbo loans have stricter requirements and typically require a lower LTV. A down payment of at least 20% – an 80% LTV – is common to offset the larger risk for the mortgage professional.
Refinancing LTV Limits
For refinancing, LTV limits depend on the loan type and the purpose of the refinance.*
- Rate-and-Term Refinance: On a conventional loan, LTV limits are often similar to those for purchase loans, possibly allowing up to 97% LTV.
- Cash-Out Refinance: When tapping into your home equity with a cash-out refinance, the LTV cap is usually 80%, ensuring you maintain at least 20% equity in the home.
LTVs and Non-QM Loans
Non-QM (Non-Qualified Mortgage) loans cater to borrowers who fall outside traditional income or credit requirements. Here’s how LTV guidelines typically apply across these flexible programs.
- Bank Statement Loans. Designed for self-employed borrowers, these loans use bank statements to verify income. Bank statement loans can reach up to 90% LTV for strong credit profiles, though caps of 80% to 85% are more common.
- DSCR Rental Property Loans. For real estate investors, DSCR loans can reach up to 85% LTV for a purchase and up to 80% for a cash-out refinance. The property’s rental income is often a factor in determining the LTV cap.
- 1099 Only Loans. For freelancers and independent contractors using 1099 forms for income verification, 1099 loans can have LTVs up to 90%. However, LTVs in the 70% to 85% range are more typical.
- Foreign National Loans. As they don’t use U.S. income or credit score for qualification, foreign national loans typically require larger down payments, with LTVs commonly between 70% and 75%.
- No Income Loans. For borrowers with significant verifiable assets, no income loans often require at least a 20% down payment (80% LTV), but a larger down payment may be needed based on the asset portfolio.
What is the combined loan-to-value (CLTV) ratio?
Once you understand your LTV, it’s also helpful to look at your combined loan-to-value (CLTV) ratio, which includes any additional financing secured by your home.
- LTV is based only on your first mortgage.
- CLTV includes your first mortgage plus any other loans secured by your home, like a home equity loan or line of credit (HELOC).
For example, if your home is worth $400,000 and you have a first mortgage of $300,000 and a HELOC of $40,000: Your LTV is 75%; your CLTV is 85%.
While your LTV measures only the balance on your first mortgage, CLTV provides a complete picture of all debt secured by your home. This helps mortgage professionals determine how much financing you can safely take on.
Understanding your LTV puts you in control of your mortgage strategy. For personalized guidance on how to hone that strategy, contact one of our mortgage professionals today at 1-888-505-8960 or connect with us online.
*Refinancing Disclaimer: When it comes to refinancing your home loan, you can generally reduce your monthly payment amount. However, your total finance charges may be greater over the life of your loan.