If you are financing the purchase of your home, you will likely hear the term LTV from your lender. It stands for loan-to-value ratio, and it refers to the amount of the loan compared to the value of the property securing the loan. The LTV is an essential factor in a mortgage transaction because it determines the amount of risk the lender is taking on.
To qualify for financing, a borrower generally needs to have an LTV of 80% or less. This means that the loan cannot exceed 80% of the appraised value of the property. So, if the home is appraised at $400,000, the maximum loan amount that a borrower could obtain with an 80% LTV would be $320,000. However, this requirement can vary depending on the type of loan and the lender’s specific guidelines.
The down payment a borrower makes can directly affect their LTV. For example, if a borrower puts down a 20% down payment, their LTV would be 80%. On the other hand, if a borrower puts down a 10% down payment, their LTV would be 90%. The higher the LTV, the riskier the loan is for the lender, which may result in higher interest rates, stricter underwriting requirements, or even denial of the loan.
Other factors that can impact the LTV requirement for loan approval include the property’s location, the borrower’s credit score, the type of property (i.e., single-family, condo, multi-unit), and the purpose of the loan (i.e., primary residence, investment property).
In addition to qualifying for financing the purchase of a home, understanding the LTV is crucial for homeowners looking to refinance their mortgages. A borrower may be able to refinance their loan to lower their monthly payments or obtain cash-out for home improvements or debt consolidation. However, the LTV requirement for refinancing can vary.