The Ultimate Guide to the LTV Ratio

The American home has transformed in recent years beyond a space for privacy and family life, and into a multifaceted entertainment hub, work pod, and retreat.

So, it's no wonder that more than three-quarters of U.S. homeowners are currently focused on pumping cash into home improvement projects.

As well as enhancing your lifestyle and wellbeing, home improvements can offer a wide range of financial benefits.

The profit margin of your home may go up after you make certain upgrades, and you can potentially recoup some or all of your capital investment when it comes time to sell. You could also save money on energy costs or get a tax break by making certain improvements.

No matter your motivations for renovating your home, one thing is clear: you'll need capital to do it. And without the cash on hand, you may need to borrow.

One thing lenders look at when they're approving loans for home renovations is your LTV ratio. So, what is the LTV ratio, and how does it affect your chances of getting a loan?

What Does the LTV Ratio Model Mean for Loan Customers?

LTV stands for "Loan-To-Value." Lenders calculate how much money they're willing to lend a borrower based on their property value, which is the LTV ratio.

In other words, financial institutions and other lenders use LTV ratios to consider profit margins and minimize their risk when lending capital.

Determining an LTV ratio is one of the most important components of the lending process. It helps assess the level of exposure to potential loss that lenders take on when approving loans for customers.

How Lenders Use the LTV Ratio Model

If you are looking to take out a loan to renovate your home, your LTV ratio is one of the first things lenders will consider. When trying to assess your LTV ratio, lenders look at two different values:

  1. The appraised value of your home: What your home is worth, according to a professional appraisal. (If you're refinancing, this number may be different from the original appraised value of your home.)
  2. The loan amount: How much cash you're asking to borrow from the lender.

Financial institutions and other lenders use these factors to evaluate the level of risk associated with lending capital to a single customer.

What is a good LTV ratio?

That's a good question. While there's no magic number for what's considered a good LTV ratio, in general, the lower a customer's LTV ratio, the better. A low LTV ratio means you have more equity in your home and are therefore seen as less of a risk to lenders.

A lower LTV ratio can even help you get a better interest rate. Lenders consider borrowers with lower LTV ratios to be less risky, which explains why.

In contrast, the higher your LTV ratio, the harder it may be to get approved for a loan. This is because a higher LTV ratio means you have less equity and higher cash outflows, putting the lender at greater risk of not getting their money back.

So, if you're looking to take out a loan for home renovations, aim to keep your LTV ratio as low as possible.

Calculating Your LTV Ratio

To calculate your LTV ratio, you'll need two pieces of information: the appraised value of your home and the loan amount. Once you have those numbers, use this formula:

LTV ratio = (Loan Amount) / (Home Value)

For example, imagine your home is worth $200,000 and you want to borrow $100,000 for renovations. In this scenario, the LTV ratio would be 50%.

($100,000 loan amount / $200,000 appraised value = 0.50 or 50%)

How to Improve Your LTV Ratio on an Existing Home

If you're looking to improve your LTV ratio on an existing home, there are some options you can consider:

What are ROI home improvements?

Generally, home improvements are considered a good way to increase the value of your home. However, as a loan user, it's important to think about your potential return on investment (ROI) before investing in a project.

Improvements that have a high ROI, such as a new roof or energy-efficient windows, add more value to home sales over the customer lifetime than improvements with a lower ROI, such as simply changing the wall color.

Before spending your hard-earned cash, be sure to do your research to ensure that the project will provide a good return on your investment. Some home improvements that are usually considered a good way to increase the value of home sales include:

Variations on LTV Ratio Rules

There are variations to the LTV ratio model that may affect the criteria for qualifying for a loan. These include the status of the property and the type of lender you want to use.

For example, the LTV ratio rules for non-owner-occupied properties are typically stricter than those for owner-occupied properties. That's because there's considered to be more risk when lending money for a property that will not be the borrower's primary residence.

Therefore, if you're looking to get a loan for a non-owner-occupied property, you may need to have a higher down payment and a lower LTV ratio.

It's also important to keep in mind that private lenders often have their own LTV ratio requirements regarding profit margins and average revenue. These may be different from those of banks or other financial institutions.

Another variation of the LTV ratio model has to do with the type of loan you're seeking.

There are two main types of loans: conventional loans and government-backed loans. Users of conventional loans typically seek out banks, credit unions, or other private lenders. Government-backed loans usually have different rules and requirements.

One common difference between conventional and government-backed loans is the LTV ratio requirements. The user experience with government-backed loans shows these often have stricter LTV ratio requirements for customers than conventional loans. That's because the government is taking on more risk by lending capital to customers with a lower down payment.

If you're looking for a government-backed loan, you may need to have a lower LTV ratio than if you were looking for a conventional loan.

What Other Factors Do Lenders Consider?

Loan-to-value ratios are just one factor that lenders look at when deciding if they will approve a customer for a loan. Other factors include average revenue, credit score, income, debts, and repayment over the customer's lifetime.

To get the best chance of having your loan approved, make sure you have a strong credit score and a steady income. You should also try to keep your debt-to-income ratio low.

The debt-to-income ratio is calculated as the percentage of your income used to pay debts. Lenders like to see a low debt-to-income ratio because it means you have more money available to make your loan payments.

A healthy debt-to-income ratio is rated as 36% or less. This means that no more than 36% of your income is used to address debts. You can improve your debt-to-income ratio by reducing your existing debts or increasing your income.

Lenders also look at your employment history, cash savings, and assets when deciding if they will approve your loan. They want to see that you have a steady income and some savings in the bank.

Therefore, having a strong credit score, a low debt-to-income ratio, and some cash in the bank are important factors when marketing yourself as a good loan risk, and these will give you the best chance of getting your loan approved.

Disadvantages of the LTV Ratio Model

Like all probabilistic models, there are a few disadvantages of the LTV ratio model for loan customers that you may already have picked up on in this guide.

First, the terms can be strict. LTV ratio model rules are quite rigid, which can make it difficult to get a loan if your property doesn't meet the requirements.

Second, it's hard to get a loan for a non-owner-occupied property. As we mentioned before, the LTV ratio rules for non-owner-occupied properties are typically tougher than those for owner-occupied properties. This can make it hard to get a loan for a rental or investment property.

A third such disadvantage is that it can limit the amount of money a bank or financial institution is willing to lend, even to a loyal customer. This means that property owners may not be able to get the full amount of money they need to complete their renovation project in the required period of time.

Another disadvantage of the LTV ratio is that it can increase your loan interest rate. This is because banks and financial institutions view loans with high LTV ratios as riskier. As a result, they may boost interest rates to mitigate this risk.

Finally, you cannot factor your projected post-renovation value into a loan agreement. This is because your LTV ratio must be based on the current appraised value of your home, not on its projected value after the renovation.

Loan Programs that Don't Use LTV Ratios

There are a few alternatives to using an LTV ratio when trying to get a loan to renovate your home.

However, these capital options also prompt a couple of considerations for the average customer. Potential users of these capital options should consider their credit scores, employment history, and the time period of the loan.

Personal loan

One such alternative is to secure a personal loan via a bank or credit union. This transaction can be a good option for those who don't have much equity in their home or for those who have a low level of capital.

Home equity loan

Another alternative is to get a home equity loan. This type of loan uses your home equity as security. Home equity loans can be a useful alternative for those who have built up equity in their home and who have good lines of credit.

Construction loan

You can also consider a construction loan. These types of loans are specifically for funding home renovation projects.

Construction loans can be a good option for those who have a detailed plan for their renovation project and who can show that they have the ability to raise the cash to repay the loan.

However, the user experience of construction loans is that they can be quite expensive. They are best suited to those who are planning a large-scale capital investment with a greater profit margin.

Lenders typically require the average customer to provide a lot of documentation, including things like building plans, contractor estimates, and proof of income and cash outflows.

Even Better: Factor Post-Renovation Value into the Loan Agreement

If you have read this whole article, you should now understand how home renovations, particularly those with an ROI focus, can increase your property value and therefore affect your LTV ratio. This is because your home's value is determined by its appraisal, which can increase after renovations.

And yet: traditionally, you can't use the projected post-renovation sales value because the LTV ratio model is based on the current appraised value of your home. For loan customers, this is a Catch-22 situation that requires an innovative solution.

That's why Housetable has developed home equity loans specifically designed for home renovations. Instead of borrowing against the current value of your home, you can actually borrow against the projected post-renovation value of your home.

This potentially allows you to get the full amount of money you need to complete your renovation project, without having to worry about a high LTV ratio or higher interest rate. So, why not consider a Housetable Home Equity Loan

Here are some of the advantages of Housetable Home Equity Loans:

  1. Inspector visits are no longer required. All of this is handled by our system from afar.
  2. You can get up to 87.5% of the expected post-renovation value of your home.
  3. Your existing mortgage remains in place.
  4. Closing costs are limited to the renovation loan only.
  5. No need to hire a HUD expert. We do everything online.

To learn more about your loan options, contact us today.


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