Homeowners and loan officers know how important calculating Loan to Value, or LTV, when applying for a refinance mortgage. Your credit could be excellent but if your do not meet the LTV requirements for a mortgage refinance then you will be turned down. In a home refinance transaction, the Loan to Value (LTV) is just as important as credit score and debt to income ratio. Let’s examine the LTV equation and its importance.
How to Calculate LTV for Refinance Mortgage?
To calculate your Loan-to-Value (LTV) ratio, divide your existing loan balance (accessible through your monthly statement or online account) by the appraised value of your home. Multiply the result by 100 to express the ratio as a percentage.
With home prices soaring and people having more equity in their homes, it is not surprising that they want to refinance. Whether they want to pay off debt or do home renovations, a refinance into a lower rate and taking out cash can be a good way to do many things that cost a lot of money.
When you decide you want to do a mortgage refinance and pull out cash, the loan to value ratio or LTV is an important factor that will determine if you are eligible. Your LTV will determine if you have enough equity to do the refinance and cash out. It also will be important to determine the terms, APR and other factors of the loan.
The LTV is the ratio of how much you owe on your current home loan, divided by the value of your home. So, if your home is worth $100,000 and your current home loan is $80,000, the LTV is $80,000 divided by $100,000, which is 80%. This 80% threshold is a common requirement for lenders to green light a refinance with the best terms and for pulling out cash.
If you think it is easier to calculate equity, you can also use this to determine your LTV. You just need to subtract the equity in the home from the total value and divide that number by the value of the home. This will work because the current value of your home is about equal to your home loan plus the equity in the home.
Equity Needed to Refinance Conventional Loan
You may have heard that you need at least 20% equity in your home to refinance, which is an LTV of 80% or less, with a conventional loan. This is not always true.
Some lenders will do a refinance even if you have only 5% equity to qualify for a conventional new loan. But if you have less than 20% equity, then you are going to have higher fees and rates, and you also will need mortgage insurance. Most lenders will waive the mortgage insurance if you have an LTV less than 80% and you have been paying your bills on time.
Still, you may find that most lenders you talk to want you to have at least 20% equity to do a refinance. You should talk to different lenders about their requirements if you want to do a refinance with a higher LTV. Keep in mind though that if you want to pull out cash with a refinance, you will need an 80% LTV.
LTV Requirements for Refinancing FHA Loan
Loans that are backed by the FHA will allow you to refinance in many situations beyond what conventional lenders will allow. FHA has a program that will allow you to do a streamline FHA refinance if you already have a loan from FHA. This type of refinance is only for getting a better rate on your home loan. You cannot pull out cash with a streamline refi through FHA.
The good thing about the FHA streamline refinance is you do not need a new appraisal, and your credit and income are not usually checked. All of this means that you can often get this refinance done in only a few weeks. FHA streamline refinancing also can happen even when you have negative equity, meaning you owe more on the home than it is worth.
To qualify for a streamline refinance through FHA, there are some requirements:
- The loan must be current; this is not a program for people behind on their loan.
- Cash out cannot be more than $500.
- Closing costs cannot be added onto the loan amount
- Mortgage insurance has to be extended to the new loan
- Lenders can offer no closing cost refinances, but they can put a higher rate on the loan
If you want to pull out cash with an FHA refinance, you will need an LTV of 85%, and all new loans do require mortgage insurance. The standard rate and term refinance program is available up to 96.5% LTV.
LTV Requirements on VA Loans
The VA product are similar to FHA financing. You can get a streamlined VA refinance if you just want to get a lower interest rate. There is no need for a new appraisal and there is no credit or income check when you apply. This loan is not for pulling out cash. One advantage over FHA refinance loans is that you do not need to pay mortgage insurance.
How to Calculate Your CLTV for a Home Equity Loan
If you’re taking out a home equity loan or HELOC, the amount of available equity you have in your home plays an important role. Your home equity is the difference between the appraised value of your home and your current mortgage balance(s). The more equity you have, the more financing options may be available to you.
When contemplating an equity loan or HELOC, incorporate the desired borrowing amount or the preferred credit limit into your existing mortgage balance. This addition results in your combined loan balance, and the corresponding combined loan-to-value formula would be as follows:
Current Combined Loan Balance ÷ Current Appraised Value = CLTV
Example: Suppose you presently hold a loan balance of $150,000 (this information is typically available on your monthly loan statement or online account), and you intend to obtain a $50,000 home equity line of credit. The current appraisal value of your home is $250,000. In this scenario, your combined loan-to-value equation would appear as follows:
$200,000 ÷ $250,000 = 80% CLTV
The Bottom Line on Loan to Value and Refinancing
Don’t believe all the bank-hype with respect to needing at least 20% equity to be eligible for home refinancing. There are options to refinance into a lower rate when you have an LTV higher than 80%. But if you want to pull out cash, you can expect to need to have 80% LTV or lower in most cases.