Loan-to-value ratio (or "LTV") is a percentage calculated by dividing your mortgage by the value of your home.
Freedom Mortgage uses LTV to help determine whether you qualify for a loan. For example, some mortgages require your LTV to be no greater than 80% if you want to qualify for that loan.
We also use loan-to-value ratio to measure a mortgage’s risk. Customers with lower LTVs have more equity in their homes, are considered less likely to default, and may qualify for lower rates or better terms when they buy or refinance a home. As a result, your loan-to-value ratio, plus other factors, can affect whether you get a mortgage and how much you pay for it.
How to calculate loan-to-value ratio
When we calculate LTV, we use your home's appraised value. It’s important to understand the appraised value is not always the same as your purchase price.
For example, let's say you want to buy a home for $300,000 and make a down payment of $60,000. This means you will need a mortgage for $240,000. Take the mortgage amount and divide it by the sale price to get the loan-to-value ratio. That is:
$240,000 ÷ $300,000 = .08 or 80%
However, most mortgage companies require a home appraisal before they will approve your mortgage. Let's say your appraisal states the home is worth only $290,000. That means the loan-to-value calculation is now $240,000 ÷ $290,000 = 0.83 or 83%.
If your mortgage requires a maximum LTV of 80%, you may need to increase your down payment or re-negotiate the price with the seller.
How does your down payment affect your loan-to-value ratio?
When you make a larger down payment, your loan-to-value ratio decreases. When you make a smaller down payment, your loan-to-value ratio increases.
Let’s look at the previous example again where your LTV was 83%. If your mortgage requires a loan-to-value ratio no higher than 80%, one way to qualify for the mortgage is to increase your $60,000 down payment as shown below.
| Sale price | $300,000 |
| Appraised value | $290,000 |
| Maximum mortgage amount (80% LTV) | $232,000 ($290,000 x 0.8) |
| New down payment amount | $68,000 ($300,000 - $232,000) |
| New LTV | 80% ($232,000 ÷ $290,000) |
In this case, you can see that increasing your down payment to $68,000 lowers your LTV to 80% and might help you qualify for the mortgage.
Another way to lower your loan-to-value ratio to 80% in this example is to ask the seller to reduce the price of their house to $290,000. This can be hard to do in a "seller’s market" where you are competing with other buyers for the same house, however. In fact, you might have to bid over the sale price, which can increase your down payment. Look at one more calculation.
| Sale price | $320,000 |
| Appraised value | $290,000 |
| Maximum mortgage amount (80% LTV) | $232,000 ($290,000 x 0.8) |
| New down payment amount | $88,000 ($320,000 - $232,000) |
| New LTV | 80% ($232,000 ÷ $290,000) |
In this case you can see that raising the sale price by $20,000 also increased the down payment by $20,000 to keep the loan-to-value ratio at 80%. When buying a house, keep in mind both your loan-to-value ratio and down payment amount!
Do you need an 80% loan-to-value ratio to buy a house?
No. Many times you can buy a home with a loan-to-value ratio greater than 80%. For example, you may qualify for a conventional loan with an LTV as high as 90% to 95%. You will pay for private mortgage insurance (PMI) until you get to 80% LTV, however. The advantage of getting a conventional loan with an 80% LTV is that you can avoid paying for private mortgage insurance (PMI), which can lower your monthly mortgage payment!
When you buy a home with an FHA loan, you may qualify for a mortgage with an LTV as high as 97.5%. When you buy a home with a VA loan, your loan-to-value ratio can be as high as 100% -- that is, you are not required to make a down payment. Note that these loans come with mortgage insurance premiums or fees you’ll need to pay.
Does loan-to-value ratio affect refinancing?
Freedom Mortgage may also look at your loan-to-value ratio when you refinance. This is particularly true when you want to tap into your home’s equity with a cash out refinance. That’s because your cash out refinance LTV affects how much money you can borrow from your home’s equity. When you refinance, we will mostly likely ask for a new appraisal to determine your home’s current value.
Freedom Mortgage is committed to helping Americans achieve the dream of homeownership. Would you like to speak to one of our loan specialists about your options? Then call 866-977-1222 or visit our Get Started page.