There are certain determinants in financial acquisitions, serving to confirm or deny their approval. When it comes to home purchases, lenders use specific ratios to decide whether they will approve of a real estate loan. The loan to value ratio is one of the primary instances of these.
In simple terms, a LTV ratio is a term that refers to the ratio between a residential property’s value and the required property loan. The first mortgage lien is the prioritized percentage in a property’s appraised value.
Calculating the LTV Ratio
The LTV ratio is calculated by dividing the required amount of loan by the home’s purchase price/ appraised value.
Understanding its calculation, and how it impacts the probability of having your loan application approved, can help you navigate the loan process with ease.
LTV Ratio – And Mortgage Rates
A lender will analyze the LTV ratio during the loan underwriting process. Individuals with a lower LTV ratio requesting a lending amount are approved for lower mortgage rates than individuals with higher LTV ratios.
The reason for this is that they are considered more reliable. Applicants with lower LTV ratios are considered to have more home equity, thus a less probability of defaulting on their mortgages. In the event that they do default, lenders have better odds of reselling the property after foreclosure.
LTV Ratio – And PMI
Apart from mortgage rate, your LTV ratio also confirms whether you pay the PMI (Private Mortgage Insurance)
In conventional loans, applicants who require elimination of the PMI have to fulfill a 20% down payment (of the appraised value). Applicants who choose to make less than 20% down payment have to keep up mortgage payments till 20% of the property value is reached.
In FHA loans, the LTV determined the amount of monthly mortgage insurance premiums(MIPs) you need to fulfill as parts of your total mortgage.
LTV Ratio– And Refinancing
If you have a high LTV ratio and an existing FHA loan, you may apply for a FHA streamline refinance loan. Though extremely high ratios are not actually ideal, you can still apply for special refinance loans.
Lenders will approve your loan request by considering your LTV ratio amongst other factors, so it is important to choose an appropriate property. Lenders’ LTV expectations can vary.
If you want more information on LTV ratio and its relevance in a loan program, feel free to reach out to us. The professionals at e-Finance Mortgage LLC can guide you through a loan program, and tailor their services according to your needs.