What is loan-to-value (LTV) ratio?
LTV stands for "Loan-to-Value" ratio. It is a ratio used to determine the size of a mortgage loan in relation to the value of the property being purchased.
The LTV ratio is calculated by dividing the loan amount by the property's value. For example, if a borrower is looking to purchase a home for $200,000 and they are putting down $40,000 as a down payment, their loan amount would be $160,000. The LTV ratio in this case would be 80% ($160,000 รท $200,000 = 0.8 or 80%). This means that the loan amount is 80% of the value of the property.
LTV ratios are used by lenders to determine a borrower's risk level. Generally, the higher the LTV ratio, the higher the risk for the lender. Borrowers with high LTV ratios may be required to pay for private mortgage insurance (PMI) as a way to protect the lender in case of default.
LTV ratio also plays an important role in determining the type of mortgage program, interest rate and down payment, typically the higher the LTV ratio, the higher the interest rate and lower the down payment.
It's important to note that different loan programs may have different LTV ratio requirements, so it's best to check with your lender for specific guidelines.