By Marina Locks
Oct 10, 2013
Definition
What is the LTV on a home? The Loan to Value Ratio (LTV) calculates how much equity you have in your home. Equity is the difference between your home’s fair market value and the balance you owe on the property.
It is important because it helps lenders determine a borrower’s qualification for loans and rates. Your LTV has a direct effect on your rate. In many cases, a lower LTV can mean you can obtain a lower rate.
How the LTV is Calculated
The LTV is calculated by dividing the amount of the mortgage by the appraised value or the purchase price of the home, whichever is less.
Here is an example of how the LTV is determined:
A loan applicant applies for a mortgage to purchase a home which the seller has agreed to sell for $350,000. The purchase price is $5,000 less than the home’s appraised value of $355,000. The loan applicant has savings of $70,000 to use for a down payment. The lender performs the following calculations:
{Purchase Price} – {Down Payment} = {Mortgage Amount}
{$350,000} – {$70,000} = {$280,000}
{Amount of Mortgage} ÷ {Purchase Price} = {LTV}
{$280,000} ÷ {$350,000} = {80%}
It’s important to note, however, if the appraisal is less than the purchase price, the borrower will have to increase his/her down payment or obtain mortgage insurance. For a loan amount over 80% LTV (loan to value ratio), Private Mortgage Insurance is required and must be obtained by the Lender.
If you have any questions about the LTV during your loan process, click here to ask a Licensed Mortgage Loan Originator.
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