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Loan to Value Ratio (LTV)

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Loan to Value Ratio (LTV)
Home > Loan to Value Ratio (LTV)

What Is Loan-to-value Meaning?

Loan to value ratio (aka LTV) is a term and calculation used in the mortgage lending and buying industries, including conventional loan and FHA loan programs, to determine how much of the loan balance is secured by the appraised value of the property.

To calculate your loan-to-value on a real estate transaction, divide the loan balance by the appraised value of the property. You can also use a loan-to-value ratio calculator to simplify the math. The higher the LTV percentage, the riskier the loan or investment is to banks or note buyers.

What Is Loan to Value Ratio Formula?

The loan to value ratio, or LTV, is pretty straightforward to figure out. You just take the amount of the loan you’re getting and divide it by the value of the property you’re buying or refinancing. Then, you usually convert that number into a percentage to get your LTV ratio.

Example of LTV

Let’s use the following example. Assume that a person is selling a loan to an investor and they want to calculate the loan-to-value before submission. One would take the remaining unpaid balance and divide it by the current property value. Let’s assume that the unpaid balance is $133,567.33 and the property value is $175,500. If we divide the small number of $133,567.33 by the larger number of $175,500 the LTV percentage is: 76%.

Balance Owed: $133,567.33
Property Value: $175,500
LTV = $133,567.33 / $175,500 = 76%

How This Affects the Sale of a Note

Every buyer has a different investment appetite and purchase criteria which comes into play when a seller submits their mortgage loan for pricing on the secondary market. Most buyers have a maximum LTV ratio of 80, meaning they expect at least 20% equity in the property. This LTV of 80 is also the cutoff at which many mortgage lenders may require private mortgage insurance.

Fortunately, we at AX will allow an LTV of 100% on residential notes (meaning nothing put down by borrower) and an LTV of 90% on commercial notes (meaning only 10% put down by borrower), even though most lenders consider that a high loan-to-value ratio. However, a lower LTV ratio often results in a lower interest rate and higher loan value. In addition, the more the borrower puts down (or the more equity in your home they have), the more your home loan or seller-financed loan is worth to a buyer.

Always try to collect the largest down payment possible when creating a seller-financed real estate loan. To learn more about creating a high-value mortgage loan, click here. To learn more about creating a high-value business loan, click here. To view the proper definition of Debt-To-Income Ratio, please click here.

Frequently Asked Questions

A good loan-to-value (LTV) ratio really depends on what you’re aiming for and the context of the loan, but generally, a lower LTV is viewed more favorably. Lenders typically consider an LTV ratio of 80 or lower as a good LTV, since it shows the borrower has more stake in the property and helps them avoid the need to pay mortgage insurance. This level of LTV also often helps borrowers avoid the need for private mortgage insurance (PMI), which is usually required when the LTV exceeds 80%. For investment properties or more stringent lending situations, a lower LTV of around 70% or even 60% might be considered more ideal to secure better interest rates and loan terms. 

A 90% loan to value ratio means you’re borrowing 90% of the property’s value, with the remaining 10% covered by your down payment. For example, on a property worth $100,000, a 90% LTV loan would mean you’re borrowing $90,000 and putting down $10,000 of your own money. This higher LTV ratio indicates a smaller down payment. If you get a loan with a high LTV, you may have to make higher monthly mortgage payments or adhere to stricter loan terms.

An 80% LTV means that the loan amount is 80% of the property’s value, with the remaining 20% being your down payment. Basically, for every $100 of the property’s value, you’re borrowing $80 and putting down $20 of your own money. 

A 75% loan to value ratio means that the loan covers 75% of the property’s total value. So, if a property is valued at, say, $200,000, a loan with a 75% LTV would amount to $150,000. The remaining 25% of the property’s value, which would be $50,000 in this scenario, would need to be provided by you as a down payment or might already be covered by your second mortgage, primary mortgage, or existing equity if refinancing.

A 60 LTV means that the loan amount represents 60% of the property’s value. So, if you’re dealing with a property that’s valued at $100,000, a 60% LTV would imply that the loan you’re taking out is $60,000. The remaining 40% of the property’s value — in this case, $40,000 — would be covered by your down payment or, in the case of refinancing, your existing equity. This kind of ratio is often sought by lenders offering a home equity loan or line of credit, since it represents less risk and greater home’s equity.

A 55 percent loan to value (LTV) means that the amount of the loan is equal to 55% of the property’s value. In simpler terms, for every $100 the property is worth, the loan will cover $55, and the remaining $45 would need to be covered by your down payment or existing equity in the property. 

A 50% loan to value ratio means that the loan amount is half of the property’s total value. So, if you’re looking at a property valued at, say, $200,000, a loan with a 50% LTV would be $100,000. The other half of the property’s value would come from your down payment or equity you already have in the property if it’s a refinancing scenario. 

The lowest loan-to-value (LTV) ratio possible is 0%, which essentially means you’re not borrowing any money against the property value at all. You’re either paying for the entire property in cash or you’ve managed to pay off your mortgage completely. So, a 0% LTV is like having no mortgage hanging over your head — you own the property outright, free and clear. In the real world, though, most people do get a mortgage, so you’ll usually see LTV ratios that are higher than 0%.