What Is Loan-To-Value (LTV) & Why Is It Important?
All Loan Programs, Interest Rates And Ultimately Monthly Payments Are Tied To The Loan-To-Value (LTV) Calculated At The Time A Loan Is Completed.
Your Loan-To-Value (LTV) Ratio is a calculated figure that identifies the size of a loan compared to the estimated value of the property securing the loan. Loan-to-value calculations are required when determining eligibility for a new loan for both purchase and refinance transactions.
Whether you are buying or refinancing your home, your loan-to-value is vital component to program and loan eligibility. The LTV is used to determine what loan programs and interest rate you can qualify for. LTV also is used to identify if mortgage insurance (PMI or MMIP) is required and what the monthly cost would be if it is required. Please review the LTV requirements for conforming loan program.
Loan-To-Value Limits For PURCHASE Loan Programs:
VA Purchase Loan: Up To 100% LTV Allowed:
VA loans allow for as little as $0 down payment for a new home purchase which is up to 100% LTV. In addition, it is possible to finance as high as 100% on a VA cash-out refinance as well all though financing up to 90% LTV on a cash-out refinance is preferred. As you can see, VA mortgages allow for more flexible LTV guidelines and are available to military personnel that have earned their VA Mortgage Benefit.
FHA Purchase Loan: Up To 96.5% LTV Allowed:
FHA guidelines require a down payment of at least 3.5%. Unlike VA and USDA loans, FHA loans are not limited by military background or location; however, there are loan limits depending on which county the property is located in. There are no special eligibility requirements. FHA loans can be an especially good fit for home buyers with lower credit scores or higher debt-to-income ratios.
Conventional Purchase Loan: Up To 95% LTV Allowed:
Conventional loans allow for as little as 3.0% down payment for first time homebuyers but it is most common to expect 5.0% down payment which is up to 95% LTV on purchases. Private mortgage insurance (PMI) is required for all loans that have an LTV which exceeds 80%. The only way to get around paying the mortgage insurance is if you get your LTV below 80%, or buying out the mortgage insurance premium.
Jumbo Purchase Loan: Up To 90% LTV Allowed:
Jumbo loans are dependent on good credit scores, verified assets (cash) and a minimum of 10% down payment for a new home purchase. If you have a home loan above $715,000, your LTV MUST be below 90% LTV for a rate & term refinance and 75% for a cash-out refinance. Jumbo loans are used for loan amounts above $715,000 and require more strict qualification guidelines which makes sense since they are intended for large loan amounts.
USDA Purchase Loan: Up To 100% LTV Allowed:
USDA loans allow for 100% LTV, which means there is no down payment required but the home MUST be in an approved location and income must meet guidelines. USDA loans are sometimes known as Rural Housing Loans. USDA loans are only available in rural parts of the country, but they are available to many suburban homeowners, too.
Loan-To-Value Limits For REFINANCE Loan Programs:
VA Refinance Loan: Up To 100% LTV Allowed For A Cash-Out Refinance:
VA loans allow the Veteran to use up to 100% LTV for a cash-out refinance but there are some scenarios and lenders that may only allow a cash-out refinance up to 100% LTV.
When a VA loan is refinanced as a rate and term refinance, that is known as a VA IRRRL refinance which is the same as a rate and term refinance. VA IRRRL loans do not require an appraisal and there are no LTV requirements.
FHA Refinance Loan: Up to 80% LTV Allowed For A Cash-Out Refinance:
FHA loans allow the homeowner to use up to 80% LTV for a cash-out refinance.
When a FHA loan is refinanced as a rate and term refinance, that is known as an FHA IRRRL refinance. FHA IRRRL loans do not require an appraisal and there are no LTV requirements.
Conventional Refinance Loan: Up to 80% LTV Allowed For A Cash-Out Refinance:
Conventional home loans allow the homeowner to use up to 80% LTV for a cash-out refinance.
When a conventional loan is refinanced with the purpose to lower the rate and payment, that is known as a rate and term refinance. Every scenario is different, and an appraisal may or may not be required based on the compensating factors of the loan such as credit scores, low LTV and low DTI.
Jumbo Refinance Loan: Up to 75% LTV Allowed For A Cash-Out Refinance:
The required LTV for Jumbo loans is based on credit scores. The higher the credit scores, the more lenient loan requirements. Jumbo cash-out loans typically allow the homeowner to use up to 75% LTV for a cash-out refinance.
A Jumbo loan can be refinanced as a rate and term refinance and finace up to 90% LTV. Every scenario is different, and an appraisal typically required to verify the appraised value for a Jumbo loan.
USDA Refinance Loan: Up to 100% LTV Allowed For A Rate & Term Refinance Only:
USDA loans do not currently allow for a cash-out refinance.
However, USDA loans are allowed to refinance the mortgage as a rate and term refinance, that is known as a USDA Streamline Loan. USDA streamline loans do not require an appraisal and there are no LTV requirements.
Please use the above calculator to run various personalized scenarios, but we hope the below examples will give additional clarification of how LTV is calculated:
Refinancing
- Home value: $100,000
- Loan balance: $80,000
- Equity: $20,000
- Loan to value: 80% (Home Value of $100,000/Loan Balance of $80,000 = .8 or 80%)
Purchase
- House price: $100,000
- Appraised value: $110,000
- Down payment: $20,000
- Loan amount: $80,000
- Loan to value: 80% (House Price of $100,000/Loan Balance of $80,000 = .8 or 80%)
Note on purchase loans: to calculate the LTV you will go off of the lower between the purchase price or appraised value)
Have questions? Give us a call! One of our mortgage specialists would be happy to answer all of your questions.