When purchasing a home in Albuquerque, it’s common to encounter unfamiliar terms. One such term is the loan-to-value ratio, or LTV.
LTV, or Loan-to-Value, is a comparison between the amount of the loan one wishes to borrow and the appraisal value of the property being purchased. Lenders use this comparison to assess the level of risk associated with a loan and decide whether or not to approve it. Additionally, the LTV is a factor in determining whether or not mortgage insurance will be required.
The higher your LTV ratio, the more risk a lender might see.
The loan-to-value ratio is a measure of the amount of a property that you own compared to the amount you owe on the mortgage used to purchase it. It is commonly used for mortgages, but can also be used for car loans and refinancing.
When applying for a loan, it’s important to understand that lenders take into account more than just the loan-to-value ratio (LTV). Your credit score, available income for monthly payments, and the condition of the asset being purchased are all factors that lenders consider during the loan approval process.
Having good credit is crucial when it comes to obtaining higher LTV loans. A high LTV ratio may result in either denial of approval or a higher interest rate. Additionally, purchasing mortgage insurance may be required to offset the lender’s risk.
How is the Loan-to-Value Ratio Calculated?
You can calculate your own LTV ratio. You take the mortgage amount and divide that by the appraised property value, and it’s expressed as a percentage.
If you were to buy a home with an appraisal value of $100,000 and then put down $10,000, you’d borrow $90,000. That leaves you with an LTV ratio of 90%. If you were to make a down payment of $20,000 instead, you’d have an LTV ratio of 80%.
The idea here is that the more money a lender gives you, the greater your LTV ratio and the more risk they’re taking on.
Collateral and LTV
When calculating LTV for a loan, collateral is likely involved. In the case of a mortgage, a lien secures the loan. As payments are made, the lien remains until the mortgage is paid off. If payments are not made, the lender can foreclose on the home and take possession of it. While seizing property is not the lender’s goal, collateral ensures they can recover some of their money if the loan defaults.
If a lender only gives you 80% of the property value, the thought is that they can sell the home even at a discount and still get their money back.
If you got a loan that was more than the value of the asset you were trying to buy, that’s negative equity. Negative equity means an LTV ratio of more than 100%. In that particular situation, it’s an underwater loan.
What Should An LTV Ratio Be?
When it comes to getting a mortgage, lenders typically prefer an LTV ratio of around 80%. If you borrow more than 80% of the home’s value, you’ll likely need private mortgage insurance to protect the lender. However, once your LTV ratio drops below 80%, your lender will usually allow you to cancel the insurance.
An FHA loan requires only a 3% down payment, resulting in a 97% LTV ratio. However, mortgage insurance payments may be required for the entire duration of the loan.
When you get a home equity loan, you’re using the value of your home and increasing the LTV ratio. Your LTV goes down if the value of your home goes up.
When it comes to mortgage lending, there is no definitive answer to what your LTV ratio should be. The key is to get it as close to an acceptable percentage as possible, but keep in mind that there are many other factors that come into play when deciding whether or not to approve a loan. These factors can include your credit score, income, employment history, and more. Therefore, it’s important to work with a lender who can help you navigate the lending process and find the best loan options for your unique situation.
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