Lenders that extend mortgage and car loans generally establish maximum loan-to-value ratios. For example, Fannie Mae offers first-time homebuyers and homeowners looking to refinance with Fannie Mae various options for loans with a 97% maximum loan-to-value (LTV) ratio. The maximum LTV ratio is calculated by dividing the amount you want to borrow by the appraised market value of the collateral guaranteeing the loan. This number is usually expressed as a percentage. For example, if you want to purchase a home valued at $250,000, and the maximum LTV ratio is 97%, the maximum amount of financing the lender would provide you would be $242,500 (97% of $250,000). Traditionally, many conventional mortgage lenders set a maximum loan-to-value ratio of 80%, which means you have to make a 20% down payment to purchase a home. The 80% is the amount that the lender is willing to finance of the home’s market value. However, many lenders now offer alternatives that allow for lower down payments and higher maximum LTV ratios.
How Maximum Loan-to-Value Ratios Work
Maximum loan-to-value ratios prevent lenders from financing more than a certain percentage of some purchases or from loaning money that exceeds a certain percentage of collateral guaranteeing the loan. They require you to bring some money to the table, which can help reduce lender risk. They are very common for mortgages and car loans but can apply to other types of secured debt, as well. To understand maximum loan-to-value ratios, it’s first important to understand loan-to-value ratios in general. A loan-to-value ratio is determined by dividing the principal balance of the loan by the current appraised market value of collateral guaranteeing the loan. For example, to determine the maximum loan-to-value ratio of a home mortgage, you would need the amount borrowed and the current appraised value of the home (often using a professional appraiser). You then would divide the amount borrowed by the current appraised value. For example, if you wanted to take out a $100,000 loan to purchase a home currently appraised at $200,000, you would calculate the loan-to-value ratio by dividing $100,000 into $200,000 then express the result as a percentage. In this case, you would have a 50% loan-to-value ratio because you’d be borrowing 50% of the value of the house. A maximum loan-to-value ratio is simply the maximum loan amount a lender is willing to approve you for based on what your collateral is worth.
Loans With Different Maximum LTV Ratios
Maximum loan-to-value ratios are usually established by lenders making secured loans, which are loans that are guaranteed by the underlying collateral. Mortgages and car loans are well-known examples of secured loans that generally have maximum loan-to-value requirements. One example of a maximum loan-to-value ratio is Fannie Mae’s 97% Loan-to-Value Mortgage. This program sets a maximum loan-to-value ratio of 97%, or 105% with a Community Seconds subordinate lien. Fannie Mae offers this program to homebuyers who would otherwise qualify for a mortgage, but don’t have the means for a large down payment. Another example is Federal Housing Administration (FHA) Streamlined Refinance loans, which have a maximum loan-to-value ratio of 97.75% with an appraisal. There are also the Department of Veterans Affairs (VA) home loans that may offer higher maximum LTV ratios, such as up to 100%, for eligible veterans, service members, and survivors with full entitlement. As mentioned, some mortgage lenders have a maximum loan-to-value ratio of 80%, which requires you to pay 20% upfront to secure the loan. If you’re able to secure a loan with a higher maximum LTV ratio, you may have to pay mortgage insurance. For example, you may be able to put down 10% to secure a mortgage with a maximum LTV of 90% and pay mortgage insurance along with your monthly mortgage payments. The good thing is that many mortgage lenders allow you to request the cancellation of mortgage insurance once your LTV ratio drops to 80% or less.
