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Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and program you may qualify for
Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.
The LTV Ratio is calculated as follows:
Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio
*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.
For Example:
Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment. If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.
$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%
In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.
On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.
Frequently Asked LTV Questions:
Q: Why do the lenders care about Loan to Value?
Bay Area lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage. Also, with a lower LTV the lender will lose less money in case of a foreclosure.
Q: Can I drop my mortgage insurance on an FHA loan?
The mortgage insurance on an FHA loan is structured differently than a conventional loan. On a 30 year fixed FHA loan, the monthly mortgage insurance can be removed after five years, as well as when the Bay Area borrower’s loan is 78% LTV.
Q: What does CLTV stand for?
CLTV stands for Combined Loan To Value. The CLTV calculation is as follows: (1st Mortgage Amount + 2nd mortgage amount) / Appraised Value of Property = CLTV
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