LTV: How Your Loan-to-Value Ratio Can Help You Get Approved for a Mortgage Loan

LTV means loan-to-value. Your LTV ratio is determined by dividing the amount of your loan (principal) by the value of your home. The number that results from this calculation is expressed in a percentage and used to determine the amount of risk involved for a lender in financing your mortgage.

LTV is one of the main aspects of a loan that lenders consider when deciding to approve or decline your application. Because there is the risk that a borrower will default on a loan, lenders must consider the LTV in order to asses that risk. Lenders calculate the LTV to determine whether or not they would have to absorb additional costs that they would not be reimbursed for if the home went into foreclosure.

Because higher LTV's carry higher risks for lenders, they are usually reserved for borrowers with good credit ratings. The lower your credit score, the less your LTV needs to be in order for a lender to approve your application.

There are ways to reduce your LTV ratio and increase your chances of being approved for a loan. First, higher down payments immediately increase the amount of equity you will have in your home and decrease the principal. Second, buying a house that is being sold for less than its appraised value offers immediate equity in the purchase.

Properties that have more than one mortgage use a form of LTV called CLTV. CLTV means combined loan-to-value. An example of a type of loan that would use CLTV is a home equity mortgage, or second mortgage. This is calculated in the same way as LTV with one difference: CLTV adds the principal on both the first and second mortgage and divides the total amount by the value of the home.

When shopping for homes and mortgages, it may be beneficial to calculate your LTV before applying for a mortgage. This can help you make decisions on both down payment and loan amounts. Knowing your LTV is the first step in getting approved for a mortgage through a lender.

Calculating your LTV is simple. You simply divide the principal amount of the loan by the value of the home you are purchasing. So, if the requested loan amount is $100,000, and the value of the home is $110,000, then the LTV would be 90%. The preferred LTV varies between lenders and is based on your credit history. Lenders rarely deny loan applications with LTV's around 80%.