# What does fha loan mean

## FHA Loans: What Does LTV Mean?

Jun 6, 2011 By FHA.com Staff Writer 2 Comments

If you’re buying a home with an FHA mortgage, one term you’ll become used to seeing in your FHA loan documents is the phrase loan-to-value. LTV is especially important for calculating FHA mortgage insurance premiums and the length of time you’ll be required to pay those premiums.

For example, on a new home loan with a term greater than 15 years, annual mortgage insurance premiums are cancelled when the LTV ratio hits 78% (as long as the borrower has paid the premiums for at least five years.)

But what IS the loan-to-value ratio? How is it calculated?

The property’s loan to value ratio is basically the percentage of the property value that is mortgaged. The FHA official site states, “If you divide the mortgage amount by the lesser of the appraised value or the sales price of the property, the result is the LTV.” The details of this calculation are important to pay attention to.

If a hypothetical property is appraised for $300 thousand, but it is offered at a sales price different than the appraised value, the lower number is used to calculate LTV. Whichever number is lowest is always used to do the math.

Take that lower number, which for the sake of our example is $300,000. Compare it to the amount of the FHA loan, which in this example is $293,250. Divide the mortgage loan amount by the appraised price (or sales price, whichever is lower) and you get 97.75% loan to value ratio because the loan is for 97.75 percent of the sales price or appraised value.

When the borrower pays down the loan, the loan-to-value ratio goes down over time. Lenders use the LTV to determine when to cancel annual FHA mortgage insurance premiums as stated earlier, but that’s not the only use of LTV when it comes to FHA loan calculations. There are plenty of other areas where LTV could be an important piece of information–including some FHA refinancing loan details.

Source: www.fhanewsblog.comCategory: Credit

## Similar articles:

credit scores range and what they mean

Credit Score: What it Means to Your Pork Production Business

Credit Scores: What the Numbers Mean in 2015