What You Need to Know About Loan to Value Ratio

Mortgage Tips

The loan to value ratio, or LTV, is the comparison of the value of your home loan and the actual value of your home. In order to determine your LTV, your lender will divide the amount of your loan by the lesser of your home’s appraised value or purchase price, if applicable.

Your loan to value ratio is important, since it is the number that your lender will use when they are underwriting your loan. Typically, borrowers that have a lower LTV ratio will qualify for a lower mortgage rate than borrowers who have higher LTV ratios. Borrowers who have a lower LTV ratio are also considered less risky to their lender since they have more equity in their homes. With a lower LTV and more equity, lenders consider these borrowers less likely to default on their mortgage. Even if they did default, the lender would have a higher chance to sell the home in foreclosure for at least as much as they are owed on the mortgage.

Your LTV ratio will also help you determine whether you will have to invest in private mortgage insurance (PMI). With conventional loans, borrowers have to make a down payment of at least 20 percent of the value of the home in order to avoid paying for PMI. FHA loans allow borrowers to have an LTV up to 96.5 percent, while VA and USDA specialty loans will allow for a 100 percent LTV for a purchase loan.

Borrowers who have an extremely high LTV ratio are considered to be upside-down on their mortgage, which means that the value of their house is much less than their loan amount. While this situation is not ideal, you may still have the option to refinance your home. There are special refinancing options for borrowers who have an LTV that is over 100 percent.

For more mortgage tips when looking to buy a new Northern California house, contact real estate professionals Cary Amo in Lafayette, California.

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