Understanding your loan-to-value ratio and how it impacts your mortgage approval can help you determine the type of loan program you need and the loan amount you may qualify for. It will also be a factor in calculating your Kansas City mortgage rate.
Loan-to-Value (LTV) Ratio Explained
Your loan-to-value ratio, or “LTV,” compares the value of your loan to your home’s value. The ratio is determined by dividing your loan amount by the lesser amount of the home’s appraised value. Mortgage lenders will evaluate your loan-to-value ratio while they are underwriting your loan.
In general, borrowers with lower LTV ratios will qualify for better Kansas City mortgage rates than borrowers with higher LTV ratios. Borrowers with lower LTV ratios are considered less risky to lenders because they will have more equity in their homes. For mortgage companies, borrowers with a lower LTV ratio are less likely to default on their mortgage.
LTV’s Affect on Down Payments
Your loan-to-value is affected by your down payment amount. For example, when you have a loan-to-value rate of 95 percent on a $220,000 loan, you will typically need to have a down payment of $11,000. Making a larger down payment allows you to start off with more equity in your home, and will lower your LTV ratio. In general, this financial accomplishment will help homebuyers achieve a lower Kansas City mortgage rate.
Private Mortgage Insurance
Your loan-to-value ratio is also a key factor in the amount of private mortgage insurance you are required to have. Borrowers using conventional loans who want to avoid paying private mortgage insurance will need to make a down payment of 20 percent of their home’s value. FHA loans will allow you to have an LTV of up to 96.5 percent. USDA and VA loans may allow for a 100 percent loan-to-value ratio.