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Loan-to-value ratio (LTV) is a key figure lenders consider when you apply for a secured loan, particularly a mortgage. Most lenders set LTV limits as part of their qualifying criteria. As a general rule, lenders typically require loan-to-value ratios to be under 80%.
Understanding how loan-to-value ratios work and what LTV ratio lenders require can help you ensure your financial footing is sound when you're ready to apply for a mortgage.
What Is a Loan-to-Value (LTV) Ratio?
Your loan-to-value ratio compares the amount of your loan against the value of the asset you've used to secure it, such as your home. So, if your home is worth $300,000 and your mortgage is $200,000, your loan-to-value ratio is 66%. In other words, your mortgage accounts for 66% of the home's value.
Mortgage lenders use LTV ratios to help them decide whether to approve you for a loan and if they'll require private mortgage insurance (PMI). Generally, a higher LTV means the lender takes on more risk that you'll default. That is why conventional loan lenders typically require you to carry mortgage insurance if your down payment is less than 20% and your LTV is greater than 80%.
By contrast, lenders tend to view borrowers with low LTV ratios as less risky. As a result, a low LTV may help you qualify for lower interest rates and a lower monthly payment.
You can calculate your loan-to-value ratio by dividing your loan amount by the purchase price of your home. Let's say you want to buy a home selling for $300,000, and your down payment is $60,000, or 20% of the property's price. In this instance, you'll need a loan for $240,000, which puts your LTV ratio at 80%, since $240,000 divided by $300,000 equals 0.8, or 80%.
What if you're buying a $300,000 house with a Federal Housing Administration (FHA) loan and a down payment of 3.5%, or $10,500? Here, you'd need to finance $289,500 with a maximum LTV ratio of 96.5% ($300,000 x 0.965 = $289,500).
What Is the Maximum LTV Ratio Lenders Allow?
Ideally, a lender will approve your purchase or refinance loan with an LTV that allows for affordable payments. Keep in mind, the maximum LTV ratio lenders allow for their mortgage loans varies by the lender and the loan type.
When shopping for a new loan, ask lenders for the maximum LTV ratio they allow for the type of loan you're seeking. Generally, you'll find higher ratios if you're purchasing a home or lowering your interest rate with a rate-and-term refinance. For a better idea of what you might expect, refer to this chart that breaks down the maximum LTV ratios for several types of loans.
|LTV Ratio Limits by Loan Type|
|Loan Type||Loan Purpose||Maximum LTV Ratio|
|FHA||Purchase||96.50% or 97%|
|Streamline refinance||No LTV requirement|
|Rate-and-term refinance||Cannot exceed new appraised value|
|Cash-out refinance||Not allowed|
|Streamline refinance||No LTV requirement|
How to Reduce Your LTV Ratio
By lowering your loan-to-value ratio, you'll pose less risk to a lender, which could improve your chances for approval and a less expensive loan. Remember, the lower your LTV ratio, the better. With a smaller loan amount, you'll pay less in interest charges, and you'll be less likely to become underwater on your mortgage if home values suffer a significant drop.
Since your loan-to-value ratio only involves two variables, you have two simple options for reducing your ratio:
- Make a larger down payment. While saving up for a sizable down payment is challenging, it is one of the most straightforward ways to lower your LTV. Increasing your down payment automatically lowers your borrowing amount, making your loan payments more affordable.
- Lower your borrowing amount. Purchasing a lower-priced home is another way to lower your LTV ratio. Since you'll be borrowing a smaller amount, your current down payment could account for a more significant portion of the loan, lowering your LTV. Another option is to submit a lower offer to the seller. In a buyer's market, a seller may be motivated to accept your offer.
Use Experian's mortgage calculator to see how increasing your down payment or decreasing your borrowing amount will impact your LTV and your monthly payments:
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
Lenders Also Consider Your Credit History
Lenders offering secured loans often consider your loan-to-value ratio when qualifying you for a loan. Of course, lenders also consider several other factors, including your income, debt-to-income ratio and credit history. Lenders will perform a hard inquiry on your credit to review how well you've managed your credit over time.
Before you apply for a mortgage on a new home or refinance your current loan, consider taking the time to review your credit and take steps to improve it if necessary. Start by checking your free credit report and credit score from Experian to see where your credit stands and identify potential improvement areas.