During your homebuying process, you may have come across the acronym ‘LTV’. You may have even heard that you need to have a good LTV to qualify for a mortgage. Simply put, LTV stands for ‘Loan-to-Value Ratio’.
But… what does that mean, exactly?
A loan-to-value ratio is the number you get when you compare your loan amount to the value of the property. It’s honestly a really simple math equation. To determine your LTV, take the mortgage loan balance and divide that number by the appraised value of your home. In an ideal situation, you’re looking for a number that equates to 80% or below. The smaller the number, the better.
Using an example from SmartAsset, if you’re buying a $300,000 home and taking out a $250,000 loan, the LTV ratio would be 83.3%. The loan-to-value math is 250,000 divided by 300,000 multiplied by 100 to find the final percentage.
Why LTV is important
While your LTV ratio does depend on the size of your down payment, it matters because mortgage lenders use the number to assess your risk as a borrower. The higher your LTV, the more of a risk you pose to lenders. When you make a low down payment, you have less equity in your home. For conventional loans, that 80% LTV number comes into play because lenders are expecting a down-payment of 20% or more.
Your loan-to-value ratio may not be as important if you’re using a different mortgage loan.
Don’t fret, though. The loan-to-value ratio is simply one of many tools that lenders use when deciding whether to approve a borrower for a mortgage loan. There are other factors that lenders take into account, such as credit scores. But if you want a low mortgage rate, it’s best to make a sizable down payment and aim for a low loan-to-value ratio.
Do all of the homebuying acronyms scare you? Be sure you’re working with a licensed Realtor. We’ve done our homework and can put your mind at ease!