How do Lenders Calculate Your LTV Ratio, and How Can You Sway it in Your Favor?

The loan-to-value ratio is a percentage that lenders use to tell you how much they are willing to lend you based on the value of your home.

The higher the LTV ratio, the more risk there is for the lender. Unfortunately, many people have an LTV ratio that is too high for them to qualify for a mortgage. However, it is not impossible to get a lower LTV ratio.

In this article, we will teach you how lenders calculate your LTV ratio and give you some ways to lower it so you can be eligible for a mortgage.

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A Brief Overview of Home Equity and LTV Ratios

If you want to take out a home equity line of credit, the amount of equity available in your home obviously plays a vital role. Basically, your home equity is the difference between your home’s worth, as determined by an appraiser, and your current mortgage balance.

If you have just bought your property, it’s worth will be determined by the purchase price in addition to the balance of your mortgage rate today.

The more equity you have, the more loan options you have available. While your loan-to-value ratio is only one factor that lenders consider when determining whether or not to grant a loan approval, it is a crucial one.

Your LTV ratio also helps lenders to decide whether or not you need to pay private mortgage insurance. If you want to avoid PMI, you typically need an LTV ratio of 80% or less. However, if your home equity line of credit is a second lien against your property, you should not have to pay PMI.

How Lenders Calculate Your LTV Ratio

So, the LTV ratio is the percentage of your home’s value, based on the appraisal. Lenders calculate your LTV ratio by taking your mortgage amount and dividing it by the appraised value. 

They then multiply the number by 100 to turn the ratio into a percentage. For example, if you have a home value of $300,000 and want to take out a loan for $250,000, lenders would calculate your LTV ratio by dividing 250,000 by 300,000.

The number is then multiplied by 100 to give a result of 83.3%.

How can you sway your LTV ratio in your favor?

While there are not many things you can do to sway your LTV ratio in your favor, there are some.

If the appraisal process involves a certified appraiser coming to your home to value it, you could spend time making improvements to the property prior to the appraiser’s visit in order to increase your home’s worth.

However, it is worth getting advice from a real estate professional to discover which improvements can add value to your home before you proceed with this option.

Another thing you can do to increase the value of your home during appraisal is to simply give the place a lick of paint and ensure it is clean and well maintained.

But the best way of trying to better your LTV ratio is to pay down your mortgage principal regularly. Assuming your payments are amortized, by simply making monthly payments that are a little more than required, you can quickly reduce your principal and therefore sway your LTV ratio in your favor.

Another way of getting a lower LTV ratio is to simply wait. By waiting to buy a home, you get the chance to save up a large down payment, be accepted for a mortgage easily, get a lower mortgage rate, and increase your share of home equity, thereby giving you a better LTV ratio when it comes time to take out a home equity loan.

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