Definition of loan-to-value ratio (LTV ratio)
Your LTV Ratio is a comparison between the value of your loan and the value of your home. To determine your LTV, your lender will divide your loan amount by the lesser of the home’s appraised value or purchase price (if applicable).
Why your LTV Ratio is important
Lenders will evaluate your loan-to-value ratio while they are underwriting your loan. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher LTV ratios. Borrowers who have a lower LTV ratio are considered less risky to lenders because they have more equity in their homes. In the eyes of a lender, borrowers with a lower LTV, and thus more equity in their homes, are less likely to default on their mortgage, and even if they did default, the lender would have a better chance of selling the home in foreclosure for at least as much as they are owed for the mortgage.
Your LTV Ratio and Private Mortgage Insurance (PMI)
Your LTV ratio will also determine whether you have to pay private mortgage insurance. For conventional loans, borrowers who want to avoid paying private mortgage insurance will need to make a down payment of 20 percent of the value of the home. FHA purchase loans will allow you to have an LTV of up to 96.5 percent. USDA, VA and other specialty loan types may allow for a 100 percent LTV for a purchase loan.
Refinance options for borrowers with a loan to value ratio over 100%
Borrowers with an extremely high LTV ratio are considered “upside-down” on their mortgage, i.e., the value of their house is less than their loan amount. Although this is not ideal, you may still be able to refinance. Special refinancing programs exist for borrowers with an LTV over 100 percent. The most common high LTV refinance program is the HARP Refinance program. If you have a FHA loan and have a high LTV, you may be eligible for a FHA streamline loan.