What is a Loan to Value Ratio and LTV Ratio Calculation

Understanding Loan To Value Ratio

When you are purchasing a home or refinancing your current mortgage, you will come across a term called loan to value ratio (LTV). It is one of the crucial parameters when it comes to financing.

The lenders would look at this parameter as one of the significant qualifying components. Let’s break it down and understand this phenomenon from a lenders perspective.

What is a loan to value ratio?

LTV is a ratio to know how much money you are borrowing against the collateral. When you are purchasing a home or refinancing it, you will come across the term LTV ratio through your loan officer.

Other than your credit score and income, your loan officer will also consider Loan to value ratio to qualify your mortgage. For example: if you are purchasing a home and you are willing to put a 20% down payment, your LTV is 80%.

For a typical conventional loan, the LTV considered is up to 80%. Lower the LTV better is the terms of the loan that you can qualify for.

LTV Ratio Calculation

Below is an example of how to calculate the loan to value ratio

Property Value (A)	Loan Amount (B)	Loan Amount (B) / Property Value (A) * 100	LTV Ratio
100000	80000	80000 / 10000 * 100	80%

Why Loan to Value Ratio is Important?

Why is LTV so important? What does it mean to a borrower? What does it mean to a lender? And what is a good LTV? Lower the LTV lower is the cost of the loan to the borrower because when the LTV is low, the risk perceived by the lender is lower.

And when the LTV is high, the risk is higher for the lender. Your loan to value ratio could be a deciding factor for the lender to know which program is best suited for you.

Benefits of Lower Loan to Value Ratio

When it comes to a new home purchase, it is always suggested to put as much as the down payment you can. The upside of doing that is it would help you to lower your costs and fetch you a better interest rate on your mortgage.

The second benefit is, if your LTV is low, this means you have good home equity. Your home equity is your money in the house, and you can use it whenever you require cash.

Another advantage of having a lower loan to value ratio is the possibility of you avoiding the private mortgage insurance (PMI) in your monthly payments.

Conclusion

LTV is a significant financial metrics that are significantly relied upon by lenders to make their decision to lend you money. On average, the LTV when it comes to new property purchases generally ranges between 60 to 80 percent.

Any loan to value ratio below 75% can be considered reasonable and risk-free by the lenders. The amount of money you are putting as a down payment may help the lender to analyze

Which loan program suits you the most? A proper loan officer will always suggest multiple options with the benefits of the programs to help you make an informed decision.

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