Mortgage Basics: Information for First Time Home Buyers

What is LTV (Loan-to-Value)?

Loan to value, or LTV as it is commonly referred to, is the ratio of Loan Amount to the purchase price or value of the property. For example, a loan of $100,000 on a property selling for $200,000 is at an LTV of 50 percent. The loan to value ratio is determined by the amount of down payment. In purchase loans: When a property is purchased, the down payment is critical to the lending decision. When the down payment is less than 20 percent, a conventional loan will require mortgage insurance. These premiums are calculated based on the amount of down payment and are automatically included in your monthly payment. In refinance loans: In a refinance transaction, the LTV is calculated on the actual appraised value. If a borrower wants to get cash out of the value of the home, most lenders will require the total loan amount be no more than 80 percent of the appraised value of the home. If the purpose of refinancing is simply to lower the current interest rate by financing the current loan amount plus applicable closing costs, you can borrow up to 80 percent of the value without requiring Mortgage Insurance. When paying off both a first and second mortgage in a refinance transaction, most lenders will require that the second loan be at least 12 months old. If the second is not seasoned for 12 months, the lender will view the consolidation of the first and second mortgages as a cash out refinance loan, subject to the lower LTV guidelines. In general, the lower the loan to value ratio, the more favorably a lender views the risk of the loan. Loan to value considerations will differ in owner occupant versus rental or non-owner situations.