What is a Loan-to-Value Ratio in a Home Appraisal?

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Everything you need to know about calculating LTV ratios, the home appraisal process, how they impact the homebuying process and vary by different loan types.

The loan-to-value (or LTV) ratio is one of the most critical factors a mortgage lender reviews when determining your mortgage loan qualifications when you’re looking to purchase or refinance. A mortgage’s loan-to-value ratio (LTV ratio) describes the proportion of the property’s value to the amount of outstanding mortgage balance. In appraising a potential home, homebuyers will have varying LTV ratios based on their specific homebuying and financing needs. Read on for the most important factors to understand about LTV ratios and how they impact the homebuying process.

What Is Loan-to-Value Ratio in Home Financing? 

An LTV is how your mortgage loan amount compares to your home’s value. For example, if you put 10% down to purchase a home, your mortgage loan is for the home’s remaining 90% total cost. This means your LTV ratio is 90%. 

Another way to calculate the LTV ratio is by considering the home value. For example, if the home is worth $300,000 and the mortgage is for $280,000, the LTV is 93%. This is because the loan is 93% of the home value.

For example, if the home is worth $300,000 and the mortgage is $280,000, the LTV ratio is 93%. This is because the loan is 93% of the home value.

Your LTV ratio is an essential part of the homebuying process. This number is crucial when a lender reviews your financial situation to determine if you qualify to purchase a new home or to refinance your existing home. 

If you’re financing your home with a mortgage loan, a home appraisal is required as part of the mortgage process. The mortgage company hires a licensed appraiser to determine the home’s value by assessing its condition, size, and location and comparing it to other recently sold homes. 

The appraiser will consider this information, determine the value and create a report so the lender can determine whether or not to approve the home loan. The lower your LTV ratio means you’ll likely secure a better mortgage rate and have more equity in your home.

Understanding the Home Appraisal Process

A home appraisal is part of every closing process where a mortgage loan is financing the home. A home appraisal helps protect the buyer to be sure they aren’t paying more for the house than it’s worth. 

A licensed appraiser, hired by the mortgage lender, will come and evaluate the house, location, home features and upgrades, and overall condition. Then, the appraiser will look at the area’s comparables to see how the house compares. This appraisal report assesses the home’s appraised value, considering the square footage, bedrooms and bathrooms, recent renovations, lot size, and the recently sold home comparables. 

In addition, the house is typically compared to three other homes in the area that were recently sold, similar in size and condition to compare prices and ensure they align. 

If the appraised value is less than the price, you can either make a larger down payment, negotiate a lower price with the seller, or walk away. If the appraised value requires a larger down payment, this will impact the LTV ratio. Any price negotiations with the seller will also affect the LTV ratio.

If the home doesn’t appraise at the offered value, this can impact the overall loan approval timeline. For example, if the appraisal is lower than the offer price, the price will need to be negotiated. Or, if the appraisal is higher than the offer price, the buyer will have more equity in the home. Both of these scenarios will result in more negotiations, which can extend the loan approval timelines and push back the closing date. An 80% loan-to-value ratio is generally a good LTV ratio. This means that homebuyers don’t have to pay for private mortgage insurance (PMI), which is required when you put down less than 20%. Having an 80% LTV ratio also means you will likely qualify for a lower interest rate. 

Loan-to-Value Ratios by Loan Type

There are different mortgage loan types. Based on these different types of loans, the LTV ratios can differ. For example, some loan programs are for homebuyers with a high LTV ratio, while others don’t factor in loan-to-value ratios. Below outlines the most common types of loan types.

  • Conventional loan: Conventional loans are guaranteed by Fannie Mae or Freddie Mac and allow up to a 97% LTV ratio. Convention loans are best for homebuyers with strong credit scores. Conventional loans are available through most mortgage lenders. PMI is required for down payments of less than 20%
  • VA Loans: VA loans are for active duty service members, Veterans, and eligible military spouses, among other qualifying groups. VA loans are  U.S. Department of Veterans Affairs and provided by mortgage companies and banks. VA Loans allow up to 100% LTV, meaning a down payment isn’t required.
  • USDA Loans: USDA loans also allow up to 100% LTV with no down payment required and are insured by the U.S. Department of Agriculture.
  • FHA Loans: FHA loans are insured by the Federal Housing Administration and allow homebuyers to finance homes with a down payment as low as 3.5%. This means those investing in a house with an FHA loan can purchase a home with up to a 96.5% loan-to-value ratio. FHA loans can be for first-time homebuyers or those with lower credit scores.
The Lower the Loan-to-Value Ratio the Better 

When you’re qualifying for a mortgage loan, the lower your LTV ratio is, the better. A low LTV ratio can result in a lower interest rate, and you’ll also have more equity in your home. Partnering with a mortgage lender who is committed to helping homeowners achieve their homeownership dreams can result in a less stressful homebuying experience. Keller Home Loans aims to help customers protect what they care about and empower customers to achieve their financial goals. 

Get pre-approved for a mortgage by applying now and get started on your home ownership journey. Contact us today to learn more.

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