The Loan to Value Ratio is commonly known by its acronym LTV. This loan to value ratio states the total value of the first mortgage against the full real estate property’s appraised value. The formula for figuring this ratio is simply the amount of the loan divided by the property value. It is expressed as a percent. So if a borrower is seeking $180,000 with which to buy a $200,000 house, then the Loan to Value Ratio is ninety percent.
The loan to value ratio proves to be among the most critical risk factors that lenders consider when they are deciding whether to qualify borrowers for a mortgage loan on a house. The dangers of a default occurring most influence the loan officers in their lending decisions. The chances of an institution having to take a hit in a foreclosure procedure only goes up as the dollar amount of the property equity goes down. Because of this, as the Loan to Value ratio goes up, the qualification tests for many mortgage programs get significantly stricter. Some lenders will insist on a borrower who comes with a high loan to value ratio on the property in question to purchase mortgage insurance. This safe guards the lender from any default realized by the borrower, but it also raises the mortgage’s total costs.
Property values used in the loan to value ratio are generally set by appraisers. Still, the most accurate value of a piece of real estate is undoubtedly that determined when a willing seller and willing buyer come together to agree on a sale. Usually, banks decide to go with the lower number when they are offered choices of a purchase price that is fairly recent or an appraisal value. Recent sales are commonly deemed to be those that happened from a year to two years ago, although every bank makes its own rules in this regard.
When a borrower selects a property that he or she will purchase with a lower loan to value ratio that is less than eighty percent, lower interest rates can many times be obtained by borrowers who are low risk. Higher risk borrowers will also be considered in such a scenario, meaning those who have prior histories of late payments on mortgages, who have lower credit scores, who have high loan requirements or higher debt to income ratios, and who have neither sufficient cash reserves nor requested income documentation. Generally, higher loan to value ratios are only permitted for those borrowers who have a reliable mortgage payment history and who possess greater credit scores. Only those buyers with the greatest credit worthiness are considered for one hundred percent financing that translates to a one hundred percent loan to value ratio.
Loans that are made to the standards of lending giants Freddie Mac and Fannie Mae and their guidelines can not have loan to value ratios that exceed or are equal to eighty percent. Any loans higher than this percentage of eighty percent must come with attached private mortgage insurance. The private mortgage insurance premiums simply go on top of the existing mortgage principal and interest payments.