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How to Calculate Your Loan to Value Ratio

When you are applying for a refinance or to purchase a home the loan to value (LTV) is usually the first value a loan officer will compute. Most borrowers under estimate the ramifications loan to value LTV has on pricing and qualifying for a loan. What you really need to know here is how to arrive at the loan to value ratio. It's pretty simple. You take the expected loan amount and divide it by expected appraisal value.

(Loan Amount / House Value = LTV)

The lower the loan to value the lower the risk of the loan for the investor. The lower the LTV the more attractive, and cheaper your loan becomes. LTV trumps all in the approval score card scenario. Meaning, low credit score can usually get an automatic approval if the LTV is low enough.  Equity is king in the mortgage business.

 

Typically, investors like to see your loan to value at 80% or below. Once your loan to value exceeds this amount you can expect to pay a higher rate (usually 1/4 of a point) and possibly mortgage insurance (PMI) The reason for this is that the forclosure rate drops dramatically when borrowers have at least 20% interest in the property, and investors know this.

Back before the government created the agencies that insure, or purchase loans from lenders (FHA, Fannie Mae, Freddie Mac etc.) banks were the only ones that would originate mortgages. Banks of that time and era would rarely loan money above 80%. Now that these loans can be insured (PMI) a whole new breed of lenders have popped up that are willing to take risk above the traditional 80%.

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