Lenders consider several factors when deciding whether or not to approve a mortgage loan. Your credit score and income weigh heavily in their decision. The size of your down payment plays a factor as well. But so does the loan-to-value ratio of the property you want to buy. What is LTV and how does it affect your chances for loan approval?

Lenders consider several factors when deciding whether or not to approve a home loan. One of these is the loan-to-value ratio. What is this and how does it affect me as a buyer?

Loan-to-Value Ratio

What is LTV?

Search Tucson homes for saleYour loan-to-value is the amount of money you wish to borrow compared to the assessed value of the Tucson property in question. Lenders use this to determine the amount of risk involved in lending you money. They use this for car loans and refinancing as well. It may be used to determine how much money you need to use as a down payment in order to receive loan approval, too.

How is LTV Calculated?

Your loan-to-value ratio is calculated by dividing the amount you borrow for the mortgage by the appraised property value. For example, you buy a Tucson home with an appraised value of $400,000. You put $40,000 down (10%). The amount you borrow is $360,000. This puts your LTV at 90%. The lower your LTV, the better risk your lender considers you. At 80% LTV ($80,000 down in this case), you do not pay PMI. That helps lower your monthly payment even more.

What is a Good LTV Ratio?

Ideally, lenders want to see an LTV ratio of 80% or less. A lender considers anything above that as a riskier investment of their money. At 80%, they figure that they stand a better chance of receiving most if not all of their money back if you default on the loan. Even so, they will approve a loan with a higher LTV ratio with a good credit score and healthy income among other things. However, you will need to pay PMI (private mortgage insurance) either until you reach 80% loan-to-value (with a conventional loan) or for the life of the loan (with an FHA loan). If you utilize an FHA loan for your home's purchase, you can refinance once you reach an 80% LTV ratio to eliminate the PMI altogether.

Rebecca Schulte, Schulte Real Estate Group, Your Source for Tucson Real Estate