What your loan-to-value means for your mortgage
When you apply for a home loan, there are a lot of numbers involved, from the purchase price to your interest rate and everything in between. One of the most influential figures is the loan-to-value calculation, or LTV. This number is critical to the interest rate for which you qualify and whether or not you will be required to pay for additional insurance.

What is LTV?
Loan-to-value is a ratio, often expressed as a percentage, that lenders use to assess the risk of a potential home loan. Lenders divide the amount of money being borrowed by the lesser of the purchase price or the appraised value of the property to determine a borrower’s LTV. The higher the LTV, the riskier the loan and, likely, the higher the interest rate paid by the borrower. A higher LTV percentage may also require the borrower to obtain private mortgage insurance to protect the lender in the instance of a loan default.

Options for low LTV borrowers
Having a smaller down payment and higher LTV does not have to prevent you from buying a home. There are different loan programs designed specifically for borrowers with high LTV. FHA loans insured by the Federal Housing Administration help lower-income borrowers with lower credit scores obtain financing. They allow for smaller down payments and an LTV of up to 96.5%, however, they do require the borrower to obtain mortgage insurance.

Have you served in the military or are you looking at homes in rural areas? Military veterans and those living in rural areas can obtain Veterans Administration (VA) or United States Department of Agriculture (USDA) home loans. Both of these federal loan programs allow for higher LTV ratios, sometimes as high as 100%.

Your lender may also be able to offer loan programs through Freddie Mac or Fannie Mae that allow for LTVs up to 97%. The HomeReady and Home Possible mortgage programs are designed for low-income borrowers for whom a large down payment can be a barrier to home ownership. An experienced lender will be able to help determine if you qualify for either program.

Get informed
As you can see, your LTV is a critical number when it comes to home financing. It is important to understand this ratio and how it can increase or decrease based on your purchase price or down payment. If you want help calculating your LTV or wonder if you qualify for loan programs designed for higher LTV borrowers, reach out to a member of our lending team. They stand ready to serve.


Additional reading