What Does Loan-to-Value Mean?

That’s it. You’re tired of renting a home. You want to own one now. Even with interest rates at more than 6% right now, homeownership is within your grasp. I mean, even when interest rates hit double digits back in the 1980s and 1990s, people still bought houses. And today’s interest rates are nowhere near that right now. When you go through the home-buying process you hear terms like FHA, Fannie-Mae, FICO, and PMI. Another term lenders pay attention to is loan-to-value. You need to understand this term as well.

How Loan-to-Value Affects a Home Buyer

What Does It Mean?

First of all, it helps to know what loan-to-value (LTV) means. Basically, the LTV is the ratio of the balance of your mortgage loan to the property’s actual value. For example, your property is worth $500,000. The balance on your mortgage is $450,000. That gives you an LTV of 90%. But what does that mean to a home buyer?

Why Does a Lender Look at LTV?

Well, the lower your LTV, the better risk you appear to the lender. On the flip side, the higher your LTV, the riskier you look to a lender. Why? Because the more you are willing to invest in the property, the less likely you will be to walk away from it, leaving the lender holding the bag for the balance of your loan. However, things like a great credit score and a sizeable down payment increase your likelihood of loan approval as well at this point in time.

What is a Good LTV?

Ideally, your LTV ratio should be at least 80% if not lower. But that means putting at least 20% of the sale price down on the loan…and that’s before closing costs. Not everyone can afford that much of a down payment. Fortunately, many lenders offer programs that require a much lower down payment for approval. But, when you borrow more than 80% of the sale price, it will cost you. Lenders charge PMI (Private Mortgage Insurance) to cover them in case you default. It’s an additional fee to your principal and interest payments. You must pay this under your balance falls below 80% of the property’s value.

Before you sign your final paperwork, talk to your lender about the loan-to-value ratio. How can you make it better? What other factors should you work on to get a good interest rate? Feel free to ask your lender any questions that might come up before you sign on the dotted line.

Muna Dionne, your Inland Empire specialist with Coldwell Banker Realty