Loan-to-value ratio, or LTV, compares your mortgage amount to a home’s value. The basic formula is simple: loan amount ÷ home value = LTV. For Washington buyers and homeowners, this matters because LTV can affect your down payment, mortgage insurance, refinancing options, and overall approval path.
Whether you’re buying a home or already own one, lenders use LTV to measure risk and evaluate your mortgage scenario. Here’s a simple guide to what the loan-to-value ratio means and how it can affect your options.
As you might have guessed, the loan-to-value (LTV) ratio is a percentage that allows lenders to compare the amount of your mortgage loan with the the appraised value of your home.
Example: If a homeowner currently has a mortgage loan with a balance of $200,000, and the home itself is valued at $250,000, then the LTV would equal 80%. (Because 200,000 is 80% of 250,000.)
To calculate the LTV you would simply divide the mortgage amount by the home’s value, and then convert the resulting decimal into a percentage.
For Washington home buyers, LTV comes into play as soon as you decide how much money to put down. The different mortgage loan programs have different requirements as to the minimum down payment. It might be as low as 3% on a conventional home loan, or 3.5% for an FHA-insured mortgage. (Or even 0%, if you happen to qualify for the VA loan program.)
Because the down payment is directly related to the loan-to-value ratio, putting more money down will result in a lower LTV, while making a smaller upfront investment will lead to a higher LTV.
LTV also affects mortgage insurance. When a homeowner’s loan-to-value ratio rises above 80%, mortgage insurance is typically required. This unique kind of insurance protects the lender from potential losses relating to borrower default. While mortgage insurance protects the lender, it’s the borrower / homeowner who actually pays for the coverage. That’s why many home buyers in Washington choose to make down payments of at least 20% when buying a house. They do it to keep the LTV at 80% or below, thereby avoiding the threshold where mortgage insurance is required.
LTV can also influence your chances for mortgage approval. A higher loan-to-value ratio represents a bigger risk to the bank or lender that makes the loan. A smaller LTV, on the other hand, is generally viewed as a lower risk to the lender. So the criteria for mortgage approval can sometimes be more stringent when there’s a higher loan-to-value.
For homeowners, LTV remains important after the purchase. It can affect whether you qualify for a refinance, because lenders often look at how much equity you have built up in the property compared to the size of your mortgage balance.
LTV also matters if you want to remove mortgage insurance later on. PMI for conventional loans can usually be cancelled later on, when the LTV drops to 80% or below. But that’s not the case for FHA loans. Most home buyers who use the FHA program to finance their purchases have to pay their annual mortgage insurance premiums (MIP) for the life of the loan.
Related: PMI helps homeowners in Washington
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
LTV stands for loan-to-value ratio. It compares your mortgage amount to the home’s value and helps lenders measure risk when reviewing a purchase or refinance.
Divide the loan amount by the home’s value, then convert the result to a percentage. For example, a $200,000 loan on a $250,000 home equals an 80% LTV.
In general, a lower LTV is viewed more favorably by lenders because it represents less risk. Many borrowers aim for 80% or lower to avoid mortgage insurance on a conventional loan.
An 80% LTV means the loan amount equals 80% of the home’s value. It also commonly marks the point where conventional borrowers may avoid or remove private mortgage insurance, depending on the loan and lender requirements.
A 95% LTV means the loan amount equals 95% of the home’s value, so the borrower has made a 5% down payment. Higher LTVs usually represent more risk to the lender and can come with stricter approval standards or mortgage insurance.
LTV is based on the home’s value as determined for the loan transaction. Lenders use the property value to compare against the mortgage amount when calculating the ratio.
The down payment and LTV move in opposite directions. A larger down payment lowers the LTV, while a smaller down payment raises it.
When the LTV rises above 80%, mortgage insurance is typically required on a conventional loan. PMI can usually be canceled later when the LTV drops to 80% or below.
Lenders use LTV to measure risk. A higher LTV generally means a higher level of risk to the lender, so approval criteria can be more stringent than they would be with a lower LTV.
LTV remains important after you buy the home because lenders often review how much equity you have compared to your mortgage balance. A lower LTV can improve refinance options, while a higher LTV may limit them.
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