Understanding Mortgage Terminology: What is LTV?

by Gabriel Traverso
CMR Columnist

When you decide it's time for a new home loan or you're ready to refinance, you may quickly find that there is probably a lot you don't know about the mortgage business.

Home Equity and Loan to Value

The mortgage process doesn't have to be quite so confusing--it really helps to understand how the process works and what lenders are looking for. Loan to value (LTV) is a relatively simple, but very important, mortgage term. Mortgage lenders use LTV as one of the decision-making criteria when they evaluate whether or not to give you a new home loan or refinance your home.

How Loan to Value Works

LTV is a ratio of how much the property is worth, based on appraisal, and how much you want to borrow against that property. For example, if you are applying for a new home loan on a property that costs $200,000 and you have a $40,000 down payment, then you'll have 20% equity in the property. Subtract the percent of equity you have in your new home (20%), or already have in the case of a refinance, from 100 to get the LTV--in this case 80%. Lenders generally weigh the LTV against your credit worthiness, among other factors, to assess the risk of making you the loan. So, if you have perfect credit and only a 15% down payment, then 85% LTV may be acceptable. However, if your credit is poor, some lenders may not be willing to make the loan unless you have a significantly larger down payment and a lower LTV.

Keep in mind that and 85% LTV is generally as high as many lenders are willing to go. You may find a lender that accepts a higher LTV, but you may also pay more for the mortgage. Put the pieces together for your own situation and, as you apply for your home loan, be sure to ask lots of questions.

About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, NV.

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