Loan-to-value (LTV) ratio compares the debt incurred to buy the home and the value of the purchased home. Lenders use it to determine loan approval terms. A higher LTV indicates more risk for the lender if the borrower defaults. The lender may be unable to sell the house to recover the loan. LTV also indicates how much equity the borrower has on the property. You may not get an approval in this case; or you may have to purchase mortgage insurance which protects your lender in case you default.
An LTV of 80% or lower is considered good when buying a home. For this, you’ll need to make a down payment of at least 20% along with closing costs. You could also consider purchasing a less expensive home so that you can put more money towards your down payment. Homeowners can try to qualify for better interest rates or even lower LTVs to reduce their monthly payments.
You can calculate your LTV by dividing the total loan amount by the total appraised property value.
There is a limit to the loan amount lenders can approve depending on the type of mortgage. For Fannie Mae and Freddie Mac, the limit is 80%. Conventional mortgages need an 80% LTV without private mortgage insurance (PMI). If you’re willing to pay the PMI, you may get up to 97% LTV.
For mortgage refinancing, your LTV varies based on the property type, whether it’s a fixed-rate or adjustable-rate mortgage, and type of refinance.
For government-insured loans like the Federal Housing Administration (FHA) mortgage, the maximum LTV can go up to 96.5% because these loans are meant for borrowers who may not be able to afford a large down payment.
The U.S. Department of Veterans Affairs (VA) loans are another type of government-backed mortgage loan meant exclusively for U.S. military members and veterans. Eligible borrowers may be able to finance 100% of the home value but are responsible for paying any closing fees and other costs that exceed the home value.
With the U.S. Department of Agriculture (USDA) loans, buyers can finance 100% of the home value for already existing homes, including excess fees like tax service, appraisal, escrow contribution, and a homeownership education fee. For new homes, the USDA generally has a maximum LTV of 90% – 100%, but excess fees are not included.
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