Understanding "LTV" (Loan-to-Value) for Mortgages

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Thank you to Zac Gaynor of Central Pacific Bank for providing this helpful info!

What is LTV?

LTV is an acronym for "loan-to-value" and the ratio of (mortgage loan balance) / (home value). As an example, a homeowner with a $200,000 mortgage loan balance and a home value of $250,000 has an LTV of 80%. LTV is a key factor in the mortgage approval process.

Simple mortgage definitions: loan-to-value (LTV)

Loan-to-Value or LTV is the amount of money you're borrowing as a percentage of your home's value.

Lenders use loan-to-value calculations on both purchase and refinance transactions. The math to determine your LTV may vary based on loan purpose, however.

For a purchase, LTV is based on the sales price of the home, unless the home appraises for less than its purchase price. When this happens, your home's LTV is based on the lower appraised value, not the home's purchase price.

Here are two simple examples to illustrate the concept of loan-to-value:

Buying a home which appraises for more than its purchase price

·        House price: $100,000

·        Appraised value : $110,000

·        Downpayment: $20,000

·        Loan amount: $80,000

·        Loan-to-value (LTV) : 80%

Buying a home which appraises for less than its purchase price

·        House price: $100,000

·        Appraised value : $90,000

·        Downpayment: $20,000

·        Loan amount: $80,000

·        Loan-to-value (LTV) : 89%

Your loan's loan-to-value is important because it helps to determine your mortgage rate and your loan eligibility.

VA loan: up to 100% LTV allowed

VA loans are loans guaranteed by the U.S. Department of Veterans Affairs. VA loan guidelines allow for 100% LTV, which means that no down payment is required for a VA loan. VA mortgages are available to certain active-duty military servicepersons, veterans, military spouses, members of the Selected Reserve or National Guard, cadets at the U.S. Military, Air Force or Coast Guard Academy members, midshipman at the U.S. Naval Academy, World War II merchant seamen, U.S. Public Health Service officers and National Oceanic & Atmospheric Administration officers, among other groups.

USDA loan: up to 100% LTV allowed

USDA loans are loans insured by the U.S. Department of Agriculture. USDA loans allow for 100% LTV -- there is no downpayment required. USDA loans are sometimes known as Rural Housing Loans but it's a misnomer, of sorts. USDA loans are available in rural parts of the country, but they're available to many suburban homeowners, too.

FHA loan: Up to 96.5% LTV allowed

FHA loans are loans insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD). FHA mortgage guidelines require a downpayment of at least 3.5 percent. Unlike VA and USDA loans, FHA loans are not limited by military background or location -- there are no special eligibility requirements. FHA loans can be an especially good fit for home buyers with less-than-perfect credit scores.

Conventional loan: up to 97% LTV allowed

Conventional loans are loans guaranteed by Fannie Mae or Freddie Mac. Both groups offer 97% LTV purchase mortgages, which means you will need to make a downpayment of 3 percent to qualify. 97% loans are available via most mortgage lenders, and private mortgage insurance (PMI) is often required. As compared to an FHA loan, conventional loans to 97 percent LTV are advised for homeowners with high credit scores. In most other cases, FHA loans are preferred.

ZACHARY GAYNOR | Senior Mortgage Loan Officer | Home Loans Division
NMLS: 378781
6 Hoolai Street Kailua, HI  96734
Phone: (808) 927-8231 | Fax: (808) 544-5962
zachary.gaynor@centralpacificbank.com | centralpacificbank.com