how ltv is used by lenders
a ltv ratio is only one factor in determining eligibility for securing a mortgage a home equity loan or a line of credit however it can play a substantial role in the interest rate that a borrower is able to secure most lenders offer mortgage and home equity applicants the lowest possible interest rate when their ltv ratio is at or below 80 1a higher ltv ratio does not exclude borrowers from being approved for a mortgage although the interest on the loan may rise as the ltv ratio increases for example a borrower with an ltv ratio of 95 may be approved for a mortgage however their interest rate may be a full percentage point higher than the interest rate given to a borrower with an ltv ratio of 75 if the ltv ratio is higher than 80 a borrower may be required to purchase private mortgage insurance pmi this can add anywhere from 0 5 to 1 to the total amount of the loan on an annual basis for example pmi with a rate of 1 on a 100 000 loan would add an additional 1 000 to the total amount paid per year or 83 33 per month pmi payments are required until the ltv ratio is 80 or lower the ltv ratio will decrease as you pay down your loan and as the value of your home increases over time in general the lower the ltv ratio the greater the chance that the loan will be approved and the lower the interest rate is likely to be in addition as a borrower it s less likely that you will be required to purchase private mortgage insurance pmi while it is not a law that lenders require an 80 ltv ratio in order for borrowers to avoid the additional cost of pmi it is the practice of nearly all lenders exceptions to this requirement are sometimes made for borrowers who have a high income lower debt or have a large investment portfolio as a rule of thumb a good loan to value ratio should be no greater than 80 anything above 80 is considered to be a high ltv which means that borrowers may face higher borrowing costs require private mortgage insurance or be denied a loan ltvs above 95 are often considered unacceptable mortgage example of ltvfor example suppose you buy a home that appraises for 100 000 however the owner is willing to sell it for 90 000 if you make a 10 000 down payment your loan is for 80 000 which results in an ltv ratio of 80 i e 80 000 100 000 if you were to increase the amount of your down payment to 15 000 your mortgage loan is now 75 000 this would make your ltv ratio 75 i e 75 000 100 000 variations on ltv ratio rulesdifferent loan types may have different rules when it comes to ltv ratio requirements fha loans are mortgages designed for low to moderate income borrowers they are issued by an fha approved lender and insured by the federal housing administration fha fha loans require a lower minimum down payment and credit scores than many conventional loans fha loans allow an initial ltv ratio of up to 96 5 but they require a mortgage insurance premium mip that lasts for as long as you have that loan no matter how low the ltv ratio eventually goes 2many people decide to refinance their fha loans once their ltv ratio reaches 80 in order to eliminate the mip requirement va and usda loans available to current and former military or those in rural areas do not require private mortgage insurance even though the ltv ratio can be as high as 100 34 however both va and usda loans do have additional fees fannie mae s homeready and freddie mac s home possible mortgage programs for low income borrowers allow an ltv ratio of 97 however they require mortgage insurance until the ratio falls to 80 56for fha va and usda loans there are streamlined refinancing options available these waive appraisal requirements so the home s ltv ratio doesn t affect the loan for borrowers with an ltv ratio over 100 also known as being underwater or upside down fannie mae s high loan to value refinance option and freddie mac s enhanced relief refinance are also available options 7upfront fees on fannie mae and freddie mac home loans changed in may 2023 fees were increased for homebuyers with higher credit scores such as 740 or higher while they were decreased for homebuyers with lower credit scores such as those below 640 another change your down payment will influence what your fee is the higher your down payment the lower your fees though it will still depend on your credit score fannie mae provides the loan level price adjustments on its website 8ltv vs combined ltv cltv while the ltv ratio looks at the impact of a single mortgage loan when purchasing a property the combined loan to value cltv ratio is the ratio of all secured loans on a property to the value of a property this includes not only the primary mortgage used in ltv but also any second mortgages home equity loans or lines of credit or other liens lenders use the cltv ratio to determine a prospective home buyer s risk of default when more than one loan is used for example if they will have two or more mortgages or a mortgage plus a home equity loan or line of credit heloc in general lenders are willing to lend at cltv ratios of 80 and above and to borrowers with high credit ratings primary lenders tend to be more generous with cltv requirements since it is a more thorough measure let s look a little closer at the difference the ltv ratio only considers the primary mortgage balance on a home therefore if the primary mortgage balance is 100 000 and the home value is 200 000 ltv 50 consider however the example if it also has a second mortgage in the amount of 30 000 and a heloc of 20 000 the combined loan to value now becomes 100 000 30 000 20 000 200 000 75 a much higher ratio these combined considerations are especially important if the mortgagee defaults and goes into foreclosure 