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LTV – Understanding the Loan-To-Value Ratio

What Is A Loan-To-Value Ratio? (LTV)

What Is A Loan-To-Value Ratio? (LTV)

Understanding Loan-to-Value Ratio: What You Need to Know When Applying for a Mortgage

When applying for a mortgage, understanding the industry jargon and acronyms can be confusing. One of these terms is “loan-to-value ratio” or LTV. This number is important because it can affect the type of mortgage you’re eligible for, your loan’s interest rate, and the fees you pay. CNBC Select covers how to understand loan-to-value ratios and why they matter.

What is a loan-to-value ratio or LTV?

A loan-to-value ratio (LTV) is a number that shows how much money is being borrowed in comparison to the value of the collateral. LTV has significant implications for mortgage applications and is expressed as a percentage. For example, if you’re purchasing a home worth $100,000 and your mortgage loan balance is $80,000, you have an 80% LTV.

The LTV requirement for a mortgage depends on the type of loan and your financial situation. If you’re struggling to find a home loan that fits your needs, try a lender that offers a larger variety of loan types. PNC Bank is CNBC Select’s best mortgage lender for flexible loan options and offers conventional loans, USDA loans, VA loans, FHA loans, and more.

How to calculate the loan-to-value ratio

The formula is straightforward: Current loan balance / current property value = LTV. You can change your initial LTV by increasing your down payment or negotiating a lower purchase price. Over time, your LTV will drop as you pay off the loan and the property (hopefully) increases in value.

LTV vs. CLTV

Whenever you’re taking out a second loan on a property, the lender will look at a combined-loan-to-value ratio (CLTV). The CLTV uses a similar formula as LTV but factors in the balances of multiple loans. If you’re looking to cash out some of your home’s equity to pay for a renovation, calculating your CLTV helps you figure out your rehab budget.

Why does LTV matter?

LTV affects what type of loans you’re eligible for and your borrowing costs. The LTV requirements for a mortgage vary depending on the loan type. Mortgages with smaller down payment requirements, for example, allow for higher LTVs. A lower LTV can get you a better interest rate, although other factors such as your credit score, the type of loan, and the loan balance also play a role.

Bottom line

Understanding loan-to-value ratio is crucial when applying for a mortgage. It can affect your loan options, interest rate, and fees. Be sure to calculate your LTV and CLTV accurately and compare lenders to find the best mortgage for your needs.

FAQs:

Q: What is loan-to-value ratio (LTV)?

A: LTV is the number that shows how much money is being borrowed in comparison to the value of the collateral.

Q: Why is LTV important when applying for a mortgage?

A: LTV affects the type of mortgage you’re eligible for, your loan’s interest rate, and the fees you pay.

Q: How do I calculate LTV?

A: The formula is straightforward: Current loan balance / current property value = LTV.

Q: What is combined-loan-to-value ratio (CLTV)?

A: CLTV uses a similar formula as LTV but factors in the balances of multiple loans.

Q: Why does LTV matter?

A: LTV affects what type of loans you’re eligible for and your borrowing costs. A lower LTV can get you a better interest rate, although other factors also play a role.

What Is A Loan-To-Value Ratio? (LTV)
What Is A Loan-To-Value Ratio? (LTV)

“LTV: Exploring the Meaning Behind Loan-to-Value Ratio”

Understanding mortgage industry jargon and acronyms can be a challenge when applying for a home loan. One of the key terms is loan-to-value ratio (LTV), which can significantly impact the type of mortgage you qualify for, your interest rate, and the fees you pay. In this CNBC Select article, the LTV ratio is explained, along with why it’s important to comprehend.

Essentially, the LTV ratio shows how much money is being borrowed in comparison to the value of the collateral. It’s expressed as a percentage, so if you are buying a $100,000 home and your mortgage loan balance is $80,000, your LTV is 80%.

The LTV requirement for a mortgage will depend on the type of loan and your financial situation. There are lenders that offer multiple loan types, such as PNC Bank, which was named the best mortgage lender by CNBC Select for its flexible loan options. Their offerings include conventional loans, USDA loans, VA loans, FHA loans, and more.

Calculating the LTV is relatively straightforward as it only requires two numbers: the loan amount and the appraised property value. All you need to do is divide the current loan balance by the current property value to determine the LTV.

If you’re taking out a second loan on a property, the lender will consider a combined-loan-to-value ratio (CLTV), which factors in the balances of multiple loans. CLTV comes into play when taking out a home equity loan or a home equity line of credit (HELOC). A higher CLTV can also help pay for home renovations.

The LTV ratio impacts what type of loans you’re eligible for and your borrowing costs. Mortgages with smaller down payment requirements allow for higher LTVs, with some loans even having an LTV of 100%. Conventional loans typically have stricter guidelines, with an LTV as high as 97% for certain programs. A lower LTV can help secure a better interest rate and increase your chances of qualifying for a mortgage.

In conclusion, comprehending your LTV ratio is crucial when applying for a mortgage because it can affect various aspects of your home loan. It’s essential to work with a lender that can help you navigate the complexities of the LTV ratio to find the best loan option for your financial situation.

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