The Term “Loan To Value Ratio” Explained

The Term “Loan To Value Ratio” Explained

What are some of the best parts about buying a home?

I’d say; the house shopping, the day dreaming, the excitement for something new, and the opportunity to design a new & fun interior space for yourself.

Yes, buying a house can be amazing, but to buy a house you’ve got to have the money to do so.

Most people will be getting a Mortgage Loan. There are different types of loan options and the type of loan you will be eligible for will depend on your “Loan to Value” ratio.

To explain it simply:

Value of Home  – Down Payment = Loan Amount

This is important for banks because it determines the risk they will be taking on your mortgage loan.

Let’s say a home is worth $100,000. You have $20,000. You pay the $20,000 up front for the home, and now you only need $80,000 from the bank in order to buy the home.
The LTV in this case is 80%, which is ideal for most banks. Having an 80% LTV means you qualify for a Conventional Loan.

80% LTV or lower is less of a risk, but 81% or higher is more of a risk for banks, which requires you to get Private Mortgage Insurance (PMI), as well as, qualifies you for a different type of loan like FHA or VA loan.

Just because you don’t have 20% or more for a down payment doesn’t mean you shouldn’t pursue buying a house, though. PMI will cost you a little extra on your monthly payment but after a few years you will most likely be able to remove it as you’ve paid your loan down which means the LTV has gone down.

There are different types of loans so everyone has an opportunity to own a home. Usually first time home buyers don’t have enough for a 20% down payment, but after your second home you might! 

The point is to start somewhere, ask me where to start today! Call me, Jill Bell, at 479.799.3023.

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