Homebuyers

All About LTV: The Acronym You Need to Know When Buying a Home

If you’re getting ready to buy your first home, congratulations. You’re in for an exciting adventure. You’re also in for a trip to the land of mortgage alphabet soup.

Loan-to-value ratios (LTV) are just one of the many acronyms that you are likely to encounter. They may sound like the latest in hi-tech televisions, but instead of providing entertainment, it provides an important metric for lenders to assess the risk in loaning money to you.

That’s a fancy way of saying that LTV is “the amount you finance based on the value of the house,” said Riana Wasbin, a Tustin, Calif.-based senior loan officer at New American Funding.

The LTV compares the amount of money being borrowed to the value of the property you’re purchasing. Put simply, if someone is making a 10% down payment and financing the other 90% with a mortgage, they have a 90% LTV.

These ratios are important because the higher they are—the more money you may be able to save.

Higher LTVs may save homebuyers money on their mortgages

Lenders typically look more favorably on lower loan-to-value ratios, especially those with a ratio of 80% or less.

These borrowers are often rewarded with lower mortgage rates. A lower rate may save money each month and over the life of the loan. That’s a big perk.

In addition, buyers who put down at least 20% and have LTVs of 80% or higher, can typically avoid paying private mortgage insurance (PMI). When a buyer makes lower down payments, PMI is added to their monthly mortgage payments to protect the lender in case the borrower stops paying their mortgage.

The downside is that having a lower LTV requires you to put down larger down payments.

If lenders consider your LTV to be too high, that may keep you from being approved for a mortgage.

The maximum LTV that are permitted vary based on a variety of factors, including the type of loan you receive.

The LTV required for FHA loans

Many homebuyers who don’t have as much saved for a down payment turn to Federal Housing Administration (FHA) loans.

FHA loans may be easier to qualify for, especially for first-time buyers. The maximum LTV for these government-backed loans is 96.5%, with down payments as low as 3.5%.

Credit score requirements may be lower than for Conventional loans, too. You may only need a 580 credit score to be eligible for that 3.5% down payment.

Some buyers may be able to qualify for an FHA loan with a lower credit score. However, they may need to put down at least 10% for an LTV of 90%.

It’s important to note that an FHA loan with a down payment of less than 20% and LTV of at least 80% requires Mortgage Insurance Premiums, similar to PMI. If someone puts down less than 10%, these fees may be added for the life of the loan.

Homebuyers may be able to get a Conventional loan with a high LTV

Conventional loans are not backed by the government, so they have their own unique requirements. Conventional loans have an LTV maximum of 97% with a 3% down payment. However, credit scores must be at least 620.

Just like FHA loans, you’ll get the best terms and rates on a Conventional loan with 20% down and an LTV of 80%. Conventional loans with lower down payments typically require PMI.

That shouldn’t deter buyers from looking, said Wasbin.

“A lot of people hold off on buying a home until they have a 20% down payment,” said Wasbin. But that could take many buyers years to save. “Get into the house now and let it appreciate.”

VA loans may have 100% LTVs

There’s a big reason why veterans, active military, and surviving spouses so often choose VA loans. If eligibility requirements are met (like credit, income, and time in service), there’s no down payment required.

That means the LTV for VA loans is as much as 100%.

VA loans are backed by the government, so credit score minimums are more relaxed than some other loans, mortgage rates are often lower than other types of loans, and there’s no PMI or debt cap.

USDA loans may have higher LTVs

Dreaming of buying a home out in the country or outside of a major city? Peace and quiet isn’t all you may find. You may also be eligible for a U.S. Department of Agriculture (USDA) loan with a max LTV of more than 100%.

That means not only do not have to make a down payment for a USDA loan, but you may also roll some fees right into your mortgage.

There are downsides, though. There are debt limits, income limits, and a somewhat narrow list of eligible properties in USDA-designated rural areas.

“Most people don’t qualify,” said Wasbin.

You can check the qualifying income and search for USDA properties here.