Ditech : Mortgage Loan – Loan to Value Ratio Explained

The loan to value ratio is an important aspect of your mortgage application. This ratio affects your approval status and the interest rate you qualify for. Here is what you need to know about loan to value ratios.

The loan to value ratio represents the part of home you are financing against the total value of the property. Mortgage lenders have specific guidelines for lending at a certain value of this ratio. If you are outside of the guidelines for a particular lender’s loan to value, your mortgage application will be denied.

Calculating Loan to Value is easy. Simply divide the total amount you wish to borrow by the value of your home. For example, if your home is valued at $180,000, and you are applying for a $120,000 mortgage loan you divide $120,000 / $180,000, and your loan to value ratio (LTV) is .66 or 66%.

The higher your loan to value ratio is, the less equity you own in your home. Mortgage lenders consider high loan to value ratios to be a greater risk. If your loan to value ratio is greater than 80% your mortgage lender may require you to purchase Private Mortgage Insurance as a condition for approving your loan. This insurance protects the lender from losses if you default on your mortgage.

If you are applying for a mortgage with a high loan to value ratio, expect the lender to charge you a higher interest rate for the loan. To avoid higher interest rates and private mortgage insurance you should save money for a larger down-payment. Use a mortgage calculator when shopping for your mortgage to help determine exactly how much mortgage you can afford. To learn more about finding the right mortgage for your situation, register for a free mortgage guidebook.