What does LTV stand for? This article will teach you about the meaning of LTV and how lenders use it in regard to mortgage qualifications.
If you are in the process of trying to buy a house, your lender may use the term LTV. But do you know what this acronym stands for?
This article will cover the meaning of LTV and teach you how lenders use it. It will also tell you how to calculate LTV, the types of home loans, and other things that LTV can mean. Keep reading to learn more!
What Does LTV Stand For?
According to Investopedia and Consumer Financial Protection Bureau, LTV stands for loan to value ratio. Different financial institutions and lenders will use this ratio to determine if they will approve a mortgage. The higher the LTV, the higher risk the loan is. If your loan is a higher risk, you will have a higher interest rate and may need to purchase private mortgage insurance (PMI).
Many things factor into getting home buyers approved for a mortgage, with a high LTV being only one. Other factors include credit score, house price, loan amount, mortgage rates, and debt-to-income ratio. As a borrower, you can talk to your lender about how to get approved for a mortgage loan or another type of real estate loan.
Before trying to get a conventional mortgage, you should consider several financial aspects, such as closing costs, mortgage payments over the life of the loan, the lifetime value of the property, and more. Sometimes, people might be able to afford monthly payments but cannot get approved for a line of credit.
At the beginning of your loan balance, your mortgage balance will be high, and you will be paying mostly interest. As the life of the loan goes on, the homeowner will be paying more principal and less interest. Some people choose to refinance to get lower monthly payments.
How to Calculate LTV
To calculate the loan to value ratio, you must divide the mortgage amount by the appraised property value. Then, this will result in a percentage amount. This percentage amount is the LTV.
For example, let’s say the home you are purchasing has an appraised value of $500,000. That number is your denominator. You are making a 20% down payment of $100,000, which means you are mortgaging $400,000. This number is your numerator.
To get your LTV, divide $400,000/$500,000 = .8 = 80%. Your LTV ratio is 80%. The home’s appraised value is not always the same as the purchase price. Depending on market value, the appraised value might be higher or lower, which can give you a higher LTV ratio or lower LTV ratio.
How Lenders Use LTV
Lenders use LTV as one of many factors to determine if someone can qualify for a mortgage. They also use LTV to determine the interest rate a person will get on their mortgage. Often, a person can get the lowest interest rate if their LTV is 80% or below.
An LTV of 80% or below denotes a 20% down payment. With a 20% down payment, a person also eliminates the PMI requirement or private mortgage insurance. If someone’s LTV is above 80%, they have an additional monthly payment between .5% and 1% of the loan annually. PMI is added as an additional layer of protection for the person providing the loan.
Types of Home Loans
There are many different types of home loans, including a conventional loan, Department of Veterans Affairs loan, FHA loan, home equity loan, USDA loan, Fannie Mae, and Freddie Mac loan. Sometimes, there are special types of loans for first-time homebuyers from the Federal Housing Administration. What kind of loan would you need to buy a home?
For example, FHA loans have a higher initial LTV ratio and require less of a down payment. FHA loans allow an LTV of up to 96.5%, which would be a 3.5% down payment. However, they also charge a mortgage insurance premium (MIP) for the loan’s entire life. Often, people choose to refinance once their LTV is at 80%.
What Are Other Meanings of LTV?
If you are in real estate or looking to buy a home, the people you speak with will likely use LTV to stand for the loan to value ratio. However, in other contexts, LTV might stand for something different. You can reference the below list of potential meanings of LTV from The Free Dictionary to try and decipher what someone might mean by LTV.
Overall, it would be best if you never hesitated to ask someone to clarify what they mean by an abbreviation like LTV. It is always better to get clarification than to incorrectly assume what a certain word means:
- Life Time Value (marketing and targeted marketing, mailing)
- Laptop Ventilator (medical equipment)
- Long-Term Variability
- Large Test Vessel
- Linear Time-Varying (systems and controls)
- Light Transport Vehicle (Pakistan)
- Land Transport Vehicle
- Lead-Time Variance
- Logistics Transfer Vehicle
- Light Tactical Vehicle (US Army)
- Local Thickness Variation
- Ling-Temco-Vought Co.
- Latvian Television (Riga, Latvia)
- Local Transport Vehicle
- Laytonville (Amtrak station code; Laytonville, CA)
- Ling-Temco-Vought Corporation
- Long Term Volunteering
- Loan to Valuation (ratio)
- Leisure Travel Van (various companies)
- Labour Theory of Value (economic theory)
Mortgage lenders use the LTV amount to approve a maximum loan amount. LTV is calculated by dividing the mortgage amount (purchase price minus down payment) by the property’s appraised value. LTV is also used in underwriting. Do you know the value of your home, or do you plan to make a home purchase or refinance in the future?