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Down Payment Requirements For A Mortgage Approval
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 Cape Cod mortgage 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.
Simply put, LTV is a calculation of the amount of equity in a property compared to the loan amount.
What Is Loan-To-Value (LTV)?
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.
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.
