The Loan-to-Value (LTV) Ratio Explained: A California Consumer Guide

When shopping for a mortgage in California, you’ll eventually encounter the term loan-to-value ratio, or LTV. This term is often used when describing the requirements for a certain type of mortgage program or product.

For example, FHA loans have a maximum LTV ratio of 96.5%. Conventional (non-FHA) mortgages with an LTV above 80% typically require private mortgage insurance, or PMI, an added cost for the borrower.

So, loan-to-value ratios are important for two reasons:

1. They play a role in whether or not you can qualify for a mortgage.
2. They also determine whether you’ll have to pay for PMI.

Let’s take a closer look at the loan-to-value (LTV) ratio, and how it affects California home buyers and mortgage shoppers.

Mortgage Loan-to-Value Ratio Explained

We’ve been using some industry “jargon” you might not be familiar with. So let’s start with a simple definition of the LTV and move on from there…

In California, LTV ratios are typically expressed as a percentage. The percentage shows how much of the property value the mortgage will cover. To calculate loan-to-value ratio, you could divide the loan amount by the appraised value of the property.

For example: If I’m using a $300,000 mortgage to buy a $400,000 house, my initial LTV ratio will be 75%. The math looks like this: 300,000 ÷ 400,000 = 0.75, or 75%. This means my loan will cover 75% of the value.

LTV Ratios Can Affect You in Two Ways

We’ve covered the basic definition of the loan-to-value ratio. But why is this number so important? How does it affect you when applying for a mortgage loan in California (or elsewhere)?

As mentioned earlier, LTV ratios can affect you in two ways. They can limit your financing options, and they can also determine whether or not you need mortgage insurance on your loan.

Generally speaking, any mortgage with a loan-to-value ratio greater than 80% will require some form of insurance. This is true for both conventional and government-backed loans.

A conventional mortgage with an LTV above 80% (or, inversely, a down payment below 20%) will typically require private mortgage insurance, or PMI. All government-insured FHA loans require insurance, because FHA borrowers typically put down less than 20% of the purchase price.

There is an inverse relationship between the loan-to-value ratio and the borrower’s down payment.

For instance, a California home buyer who makes a 20% down payment will have an LTV ratio of 80%. On the other hand, a borrower who only invests 5% up front would have a loan-to-value ratio of 95%. So the higher your down payment, the lower your LTV ratio (with all other things being equal).

Low Down Payments for FHA and VA

Certain types of loans offer 100% financing. This means the borrower does not have to make a down payment at all.

For instance, the VA home loan program offers 100% financing. In this scenario, the loan-to-value ratio can be up to 100%. The borrower puts nothing down, so the bank or lender covers the entire purchase amount.

The FHA mortgage program allows LTV ratios up to 96.5%. This is what makes the program popular among first-time home buyers in California. According to HUD guidelines: “for purchase transactions, maximum LTV is 96.5% (the reciprocal of the 3.5% required investment).” This means the borrower can make a down payment as low as 3.5% of the purchase price, when using a government-insured FHA loan.

Conclusion and Summary

This article explains the loan-to-value ratio, as it relates to California mortgage loans and borrowers. We’ve covered several important concepts above, so let’s end with a summary of key points:

• The LTV ratio is a comparison between the amount being borrowed and the appraised value of the property being purchased (or refinanced).
• You can approximate the LTV by dividing the loan amount by the home’s current value.
• Loan-to-value ratios influence your ability to qualify for certain mortgage products or programs.
• They also determine whether or not you’ll have to pay mortgage insurance, which can increase the size of your monthly payments.
• In California, home loans with an LTV above 80% typically require some form of insurance.

Questions? Bridgepoint Funding serves the entire state of California and offers a broad range of financing options. Please contact us if you have mortgage-related questions or would like to apply for a loan.