High or Low LTV: Does It Affect Your Ability to Get a Mortgage?


LTV (short for loan-to-value ratio) is closely associated with equity, down payment, and appraisal. Lenders consider it as a primary factor involved in making a mortgage to a certain borrower and whether he/she qualifies for that mortgage. A lower LTV is ideal but there are high LTV mortgages you can tap.

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LTV: A Yardstick to Measure Risk

The loan-to-value ratio represents your outstanding loan amount relative to your home’s market value. It is usually expressed as a percentage, e.g. 80% LTV, 90% LTV, 75% LTV.

This ratio is used in loans that have assets put up as collateral such as homes, cars, RVs, and boats. Lenders want to ensure that the asset has adequate value that they can recoup in case of loan default. To confirm this, an appraisal is required before any purchase or refinance transaction.

Meanwhile, your down payment can lower or increase your loan-to-value ratio. If you put down 20% or 10% of the home’s purchase price, your LTV will be 80% or 90% respectively, the latter being considered risky by conventional loan standards. The same goes for those making down payments less than 5%.

When you make a small down payment, you’ll need to take out a bigger loan to cover the remaining portion of the purchase price. This is where the perceived risk comes in.

Your down payment also serves as your initial equity in the home and when you have little to none and home prices go down, you might be at risk of being underwater.

Nevertheless, a high LTV is not exactly a dealbreaker. There are instances when a lender can still make a high LTV mortgage. And there are mortgages made for those who can’t afford down payments beyond 5%, offering up to 100% financing.

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High LTV Mortgages With Low to Zero Down Payments

Lenders employ a holistic approach in evaluating a borrower’s creditworthiness and a loan’s soundness; LTV, credit score, debt-to-income ratio and assets are some of these risk factors.

It’s possible to compensate a high LTV with a stellar credit record, a low DTI or a sizeable amount of assets per the lender’s underwriting.

However one may want to lower his/her loan-to-value ratio, the fact of the matter is not everyone can afford a large down payment on his/her first home.

Saving for a down payment is a lofty goal but it’s not necessarily feasible if faced with a tight sale schedule. These low down payment mortgages could be the answer to your need for a mortgage.

Examples are VA and USDA loans that allow minimal to zero down payments. These loans can cover up to 100% of the total price for a home and are backed by the government, making them safe for the lenders to make. FHA loans can be taken out with as little as 3.5% down payment to borrowers with credit scores 580 and up.

From the government-backed mortgages, we moved to government-sponsored enterprises or agencies such as Fannie Mae and Freddie Mac. Fannie has HomeReady™ that allows down payment as low as 3%. Down payments on Freddie’s Home Possible Advantage™ and Home Possible™ mortgages range between 3% and 5%.

Car Loans Too Have LTVs

LTVs are not just relevant in the mortgage industry. As noted earlier, car loans and any loan that requires a down payment and an asset as collateral will involve a loan-to-value ratio.

But unlike homes that require appraisals, new and used cars are weighed by their Kelley Blue Book and NADA book value while new vehicles will rely on their suggested retail price.

Calculating the LTV for cars and mortgages follows a similar process and down payment schemes.

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