It is easy to sometimes get lost in the world of real estate terminology. That’s why each week I blog to explain different terms and vocabulary that you should understand when buying or selling a home.
This week is focused on the term “loan-to-value ratio.”
Loan-to-value ratio is actually an easy concept that just sounds intimidating. The loan-to-value ratio (often just referred to as LTV) most often simply this: the amount of your loan in relation to the price or value of the home. This typically gets expressed as a percentage.
To get the LTV you divide the mortgage amount by the value. The LTV ratio is also another way of articulating how much a buyer is using as a “downpayment” in the process (and should not be confused with due diligence or earnest money).
For example, if you are putting $40,000 down on a $200,000 home, you divide $40,000 by $200,000 and convert to a percentage (40,000/200,000 = .2, which is 20%).
LTV ratio, perhaps most importantly, will be used by lenders to determine if any special lending programs are needed, what rates they may offer you, and whether or not things like private mortgage insurance (which will be covered in another post) are required.
Some loan programs are available with very low LTV, and it isn’t uncommon, for example, to see something like a first-time buyer loan that offers a 5% program or a VA loan that offers a 0% option. You should explore the details of different program with a lender you trust. If you need a referral to a good lender, don’t hesitate to get in touch, and I’ll be happy to connect you.
- Gary A. Miller