, Oct 02, 2012
-When shopping for a mortgage, one term you are likely to hear is a "loan-to-value ratio," also known as an LTV. What is a loan-to-value ratio?
"The LTV is the loan amount expressed as a percent of either the purchase price or the appraised value of the property," explains Mike Litzner, broker at Century 21 American Homes. It is an important factor considered by lenders before approving a mortgage, and one of the key risk factors that lenders assess when qualifying borrowers.
Few lenders will lend the full value of a property unless they have guarantees such as those offered by the Veterans Administration (VA). Otherwise, the risks are lofty, because if the borrower defaults in the early years of the loan, the lender is stuck with a bad loan.
As a result, lenders often prefer a down payment of 20 percent, with an 80 percent LTV.
LTV ratios below 80 percent carry with them lower rates for lower-risk borrowers, and allow lenders to consider higher-risk borrowers. What makes a buyer high risk? According to Litzner, it's a negative credit history, as well as high debt-to-income ratios and insufficient income documentation. Higher LTV ratios (above 80 percent) are typically reserved for borrowers with higher credit scores and a clean mortgage history.
"Often, consumers also get thrown off by 'combined LTVs,'" explains Litzner. This may sound more complicated, but, according to Litzner, it merely indicates that additional loans on the property have been considered in the calculation of the percentage ratio.
Buying private mortgage insurance, which insures the lender against default, can reduce the LTV to 90 or 95 percent, making it possible to have a down payment of 10 or 5 percent.
For more information on financing your home, please contact Century 21 American Homes
, or 1-800-270-6318.