LTV stands for loan-to-value, as in loan-to-value ratio. When mortgage lenders describe their various loan products they’ll often specify that specific loans are capped with a certain LTV. For instance, a 30-year fixed-rate mortgage might have a 90% LTV. This means a borrower must put down at least 10% for a home purchase because the bank is only willing to issue home mortgage loans for 90% of the home’s value.
Some people get confused about the definition of LTV because they don’t compare the right things. To properly understand the loan-to-value concept, always think in terms of the maximum financing amount a lender will provide – that’s the loan part – and compare it to the appraised value of the property.
So if you’re buying a house worth $300,000 and getting a mortgage with a 90% LTV, the maximum the bank will loan against the residence is $270,000, and you need to come up with $30,000 down payment.
A loan with a higher LTV – such as a 95% loan-to-value ratio – means the lender is willing to be more aggressive, or more liberal in its lending guidelines. If you qualify, you only have to put down a 5% down payment (or $15,000 in the example above) because the lender is willing to provide a mortgage worth 95% of the home’s value.
Of course, the flip side is true as well: with a lower LTV of 80%, the bank isn’t willing to take as much risk. They want you to walk in the door with more equity because that protects their loan in the event of falling real estate prices. In this scenario, with an 80% LTV, you’d have to fork over a larger, 20% down payment (or $60,000) to get the deal done.
-
DTI or Debt-to-Income Ratio
DTI is an acronym that stands for your debt-to-income ratio. Before a lender will approve a home loan, that lender wants to know that you have adequate income to repay a mortgage. Lenders assess your repayment ability, in large part, based on your debt-to-income levels.
Banks vary in their requirements, but generally speaking, most lenders want your debt-to-income ratio to cap out between 43% and 46%. (Some will go higher, and allow your debt-to-income ratio to push as high as 50%. But DTIs in the 40s are most common) you’d have to contact your bank.
So let’s say your annual salary is $60,000, or $5,000 per month. If a lender’s debt-to-income cap is 45%, your total debts can’t exceed $2,250 per month ($5,000 x .45). In calculating your debts, lenders will look at everything listed on your credit report that has to be paid off in 6 months or more, including credit card bills, auto loans, college debt and so son.