The loan-to-value ratio is a measure of the risk that lenders use to decide how much of a loan they are going to approve. For a mortgage mortgage, the maximum loan-to-value ratio is usually 80%. As a general rule, a good loan-to-value ratio should not exceed 80%. Anything above 80% is considered a high LTV, meaning that borrowers may face higher borrowing costs, need private mortgage insurance, or be denied a loan.
LTVs above 95% are often considered unacceptable. However, you may qualify for a home loan with an LTV well above 80%. In some cases, 100% LTV is even allowed (meaning you don't have to make any down payment). The LTV ratio of a mortgage can be especially important because, in addition to influencing the approval and terms of your loan, you may have to purchase mortgage insurance if you have less than 20% equity in the home.
The standard LTV; the CLTV, which combines your first mortgage with the amount you have withdrawn from your second mortgage; and the HCLTV, which considers the total balance of your first and second mortgages, regardless of the amount you have withdrawn. Because your LTV ratio is higher than 80%, you may have to pay for private mortgage insurance (PMI), a policy that helps protect mortgage lenders. The difference is that the LTV only takes into account the first mortgage (the one with which you bought the home), while the CLTV takes into account your first mortgage and any other subsequent mortgage, such as a HELOC or a home equity loan. Paying your mortgage on time and conducting market research on comparable homes in your area before buying can help you avoid a subsidized mortgage.
With an 80% LTV, you'll be able to opt for preferred loan options with better rates and you'll avoid private mortgage insurance (PMI), which could save money on your mortgage payments. The main drawback of the information provided by an LTV is that it only includes the main mortgage that the landlord owes and does not include in its calculations other obligations of the borrower, such as a second mortgage or a home equity loan. If you already have a mortgage and want to apply for a second one, your lender will evaluate the combined LTV (CLTV) ratio, which takes into account all the loan balances for the property, the outstanding balance of the first mortgage and now of the second mortgage. Victoria Araj is a section editor for Rocket Mortgage and held positions in mortgage banking, public relations and more during her more than 15 years with the company.
