December 26th, 2018 7:33 AM by Jackie A. Graves, President
FREEHomePurchaseAnalysis Today'sMortgageRates FREEHomeRefinanceAnalysis
What is the Loan-to-Value Ratio - LTV Ratio
(LTV) ratio is an assessment
of lending risk that financial institutions and other lenders
examine before approving a mortgage. Typically, assessments with high LTV
ratios are higher risk and, therefore, if the mortgage is approved, the loan
costs the borrower more. Additionally, a loan with a high LTV ratio may require
the borrower to purchase mortgage
insurance to offset the risk to the lender.
is calculated by dividing the amount borrowed by the appraised value of the property,
expressed as a percentage. For example, if you buy a home appraised at $100,000
for its appraised value and make a $10,000 down
payment, you will borrow $90,000 resulting in an LTV ratio of 90%
The loan-to-value ratio is a critical component of mortgage underwriting,
whether it be for the purpose of buying
a home, refinancing a current mortgage into a new
loan or borrowing against accumulated equity within a property.
Lenders assess the LTV ratio to determine the level of exposed risk they take
on when underwriting a mortgage. When borrowers request a loan for an amount
that is at or near the appraised value and therefore a higher loan-to-value
ratio, lenders perceive that there is a greater chance of the loan going into default because there is little to no equity
built up within the property. Should foreclosure
take place, the lender may find it difficult to sell the home for enough to cover
the outstanding mortgage balance and make a profit from the transaction.
factors that impact LTV ratio are down payment, sales (contract) price and
appraised value. To achieve the lowest (and best) LTV ratio, raise the down
payment and try to lower the sales price. Using the example above, suppose you
buy a home that appraises for $100,000 but the owner is willing to sell for
$90,000. If you make the same $10,000 down payment, your loan is only $80,000
resulting in an LTV ratio of 80% (80,000/100,000). If you increase your down
payment to $15,000 your mortgage loan is now $75,000 making your LTV ratio 75%
All of this is important because the lower the LTV ratio, the
greater the chance the loan will be approved, the lower the interest rate is
likely to be and the less likely you will be required to purchase private
mortgage insurance (PMI).
loan-to-value ratio is not the only determining factor in securing a mortgage, home-equity
loan or line
of credit, it does play a substantial role in how much borrowing
costs the homeowner. In fact, a high LTV ratio can prevent you from qualifying
for a loan or refinance option in the first place.
lenders offer mortgage and home-equity applicants the lowest possible interest
rate when the loan-to-value ratio is at or below 80%. A higher LTV ratio does
not exclude borrowers from being approved for a mortgage, although the total
cost of the loan rises as the LTV ratio increases. A borrower with an LTV ratio
of 95%, for instance, may be approved, but the interest rate may be up to a
full percentage point higher than for a borrower with an LTV ratio of 75%.
addition, if the LTV ratio is higher than 80% you will likely have to purchase private
mortgage insurance (PMI) which can add anywhere from 0.5% to 1%
of the entire loan amount on an annual basis. PMI of 1% on a $100,000 loan, for
example, would add $1,000 to the amount paid per year or $83.33 per month. PMI
payments continue until the LTV ratio is 80% or lower. The LTV ratio will
decrease as you pay down your loan and as the value of your home increases over
an 80% (or lower) LTV ratio to avoid PMI is not law but it is the practice of
nearly all lenders. Exceptions are sometimes made for borrowers with high
income, lower debt or other factors like a large investment portfolio.
loan types have special rules when it comes to the LTV ratio.
loans, which allow an initial LTV ratio of up to 96.5%, require a mortgage
insurance premium (MIP) that lasts for as long as you have that
loan no matter how low the LTV ratio eventually goes. Most people refinance to
a conventional loan once the LTV ratio reaches 80% to eliminate the MIP.
USDA loans – available to current and former military or those in rural areas,
respectively – do not require private mortgage insurance even though the LTV
ratio can be as high as 100%. However, both VA and USDA loans do have
Mae’s HomeReady and Freddie Mac’s Home Possible mortgage programs for
low-income borrowers allow an LTV ratio of 97% (3% down payment) but require
mortgage insurance until the ratio falls to 80%.
refinance options, which waive appraisal requirements (meaning the home’s LTV
ratio doesn’t affect the loan), exist for FHA, VA and USDA loans. For those
with an LTV ratio over 100% – also known as being “underwater” or “upside down”
– Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced
Relief Refinance, which are designed to replace the HARP Refinance Program that
expires Dec. 31, 2018, are available.
ratio of 80% or lower is considered good for most mortgage loan scenarios. An
LTV ratio of 80% provides the best chance of being approved, the best interest
rate and the greatest likelihood you will not be required to purchase mortgage
insurance. As noted above, however, VA and USDA loans allow for a higher LTV
ratio (up to 100%) and still avoid costly private mortgage insurance, though
other fees do apply.
refinance options, unless you are applying for a cash-out
refinance, LTV ratio doesn’t matter, so there is no such thing as
“good” or “bad.” If you apply for a cash-out refinance, an LTV ratio of 90% or
less is considered good.
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