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What Is LTV?
by Joe Taylor Jr.
CMR Columnist
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Prior to mortgage approval, lenders must consider the Loan to Value ratio, known as LTV. With more lenders offering mortgages with little or no money down, underwriters use LTV to minimize risk for themselves and for borrowers.
Until recently, LTV was a term you only heard when speaking with industry insiders and hard-core mortgage geeks. LTV is actually a simple mortgage rate computation. You can run the numbers yourself to help find the right lender for your home purchase.
LTV is computed by dividing the amount you want to borrow by the appraised value of your home. For example, you want to buy a $150,000 house. With a down payment of 20% ($30,000) you would apply for a $120,000 mortgage. Therefore your LTV would be 80% since the loan amount is 80% of the total value of the home.
The Right LTV Can Get You a Great Mortgage Deal
Lenders take LTV into consideration before approving a mortgage. Banks prefer to underwrite loans with LTV figures between 50% and 80%. Private lenders and mortgage brokers can underwrite deals with LTV figures higher than 80%, but those deals often require expensive private mortgage insurance payments.
Meanwhile, if your LTV falls below 50%, you might not need a mortgage for long enough to earn the lender a decent profit. In those cases, experts recommend setting aside some of your funds until after you have closed your deal, then paying down a chunk of the principal.
You can adjust your LTV figure by changing the amount of your down payment, or by getting an independent appraisal on the property.
Sources
DoItYourself.com
Wikipedia
About the Author
Joe Taylor Jr. coaches beginning mortgage brokers to provide better customer service and to understand creative financing opportunities.
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