What is a Loan-to-Value (LTV) Ratio?
The loan-to-value (or LTV) ratio is one of the most critical factors a mortgage lender reviews when determining your mortgage loan qualifications when you’re looking to purchase or refinance. A mortgage’s loan-to-value ratio (LTV ratio) describes the proportion of the property’s value to the amount of outstanding mortgage balance. In appraising a potential home, homebuyers will have varying LTV ratios based on their specific home buying and financing needs.
What Is Loan-to-Value Ratio in Home Financing?
An LTV is how your mortgage loan amount compares to your home’s value. For example, if you put 10% down to purchase a home, your mortgage loan is for the home’s remaining 90% total cost. This means your LTV ratio is 90%.
Another way to calculate the LTV ratio is by considering the home value. For example, if the home is worth $300,000 and the mortgage is for $280,000, the LTV is 93%. This is because the loan is 93% of the home value.
Your LTV ratio is an essential part of the homebuying process. This number is crucial when a lender reviews your financial situation to determine if you qualify to purchase a new home or to refinance your existing home.
If you’re financing your home with a mortgage loan, a home appraisal may be required as part of the mortgage process. The mortgage company may require that an appraisal, completed by a licensed appraiser, be done to determine the home’s value by assessing its condition, size, and location and comparing it to other recently sold homes. The appraiser will consider this information, determine the value and create a report so the lender can determine whether or not to approve the home loan. The lower your LTV ratio means you may secure a better mortgage rate and have more equity in your home.
Loan-to-Value Ratios by Loan Type
There are different mortgage loan types. Based on these different types of loans, the LTV ratios can differ. For example, some loan programs are for homebuyers with a high LTV ratio, while others don’t factor in loan-to-value ratios. Below outlines the most common types of loan types.
Conventional Mortgages: Allow up to an 80% LTV ratio. Conventional mortgages are available through most mortgage lenders. Refinances are also considered conventional and are generally limited to an 80% LTV.
High Ratio Insured Mortgages: Are available from most lenders and insured by one of three default insurance companies They allow homebuyers to purchase homes with a down payment as low as 5%. High Ratio Insured mortgages can be for anyone buying a home to live in, not just for first-time homebuyers. Some property types will require a minimum down payment of more than 5%. Purchase prices in excess of $500,000 also require more than 5% down.
The Lower the Loan-to-Value Ratio the Better
When you’re qualifying for a mortgage loan, the lower your LTV ratio is, the better. A low LTV ratio can result in a lower interest rate, and you’ll also have more equity in your home. Partnering with a mortgage lender who is committed to helping homeowners achieve their homeownership dreams can result in a less stressful homebuying experience.
Keller Mortgage Canada aims to help customers protect what they care about and empower customers to achieve their financial goals
*Information provided is for general knowledge, it is subject to change. The insights contained in our blog is not to be considered professional advice for any specific person or circumstance. Seek an expert one on one consultation from us based on your situation and we can help*