Taking out a home loan for a home purchase is standard procedure for a majority of homebuyers. To assess the risk of lending, mortgage lenders use what it known as a loan-to-value ratio.
LTV Ratio Measures The Risk Of A Loan
LTV ratio is the part of the home’s appraised property value that is not covered by your down payment. This ratio is a tool that mortgage lenders use to assess the risk of a mortgage before approving it for a borrower.
LTV ratio is calculated using the following formula:
Mortgage amount / Appraised property value x 100 = LTV ratio
You Can Lower Your LTV Ratio
The higher the percentage, the riskier the loan to the lender, resulting in higher interest rates and monthly payments. As such you may be required to purchase private mortgage insurance (PMI). You can lower your LTV ratio by putting more down on the home and paying more towards the principal each month.
LTV Ratio Should Not Be Confused With Debt-To-Income Ratio
Remember that your LTV ratio is not the same thing as your debt-to-income ratio (DTI). While your LTV ratio determines your lending risk, your DTI ratio is the percentage of your monthly debt payments to your gross monthly income.
At Mortgage of Homes, our experienced agents are ready to help you begin your journey to homeownership. We are here to answer your questions and advocate for you.