REAL ESTATE “A TO Z” – LOAN-TO-VALUE RATIO

A loan to value ratio (LTV) is the amount of a mortgage loan compared to the value of the property that it is being used to purchase. The ratio is presented as a percentage, and is calculated by dividing the total mortgage loan amount by the total property value. Here’s an example to illustrate the concept, using a $750,000 property with a $60,000 down payment.

First, we need to obtain the mortgage amount, which is calculated by subtracting the down payment from the property value: PROPERTY VALUE – DOWN PAYMENT = MORTGAGE AMOUNT $750,000 – $60,000 = $690,000 Then, the mortgage amount is divided by the property value: MORTGAGE AMOUNT ÷ PROPERTY VALUE = LOAN-TO-VALUE $690,000 ÷ $750,000 = 0.92 or 92% loan-to-value Mortgage loans with an LTV greater than 80% require borrowers to take out mortgage insurance.

These mortgages are also called high loan-to- value or high ratio mortgages. To avoid high ratio mortgage insurance, the only options are to either increase the size of the down payment or to decrease the property value by purchasing a less expensive home. In the example above, that would mean putting a down payment of $150,000 or more, or purchasing a property valued at $300,000 or under.