Loan-to-Value Ratio

Loan-to-Value Ratio

The loan-to-value (LTV) ratio is an important metric that lenders use to assess the risk of lending money to you as a borrower. This ratio expresses the loan amount as a percentage of the property’s value and is calculated by dividing the requested loan amount by the appraised value of the home.

The property value used to determine the LTV ratio comes from a home appraisal. The figure provided in the appraisal report is used by lenders to calculate the ratio, which is then submitted along with your loan application for underwriting. The LTV ratio plays a significant role in both determining your eligibility for the loan and estimating the costs and fees you will incur for borrowing the money.

If your LTV ratio is low, you may qualify for lower interest rates. A lower loan-to-value ratio indicates that you have more equity in your home, which suggests to lenders that you are less likely to default on the loan. This gives lenders additional security because if you were to default, they could sell the property in foreclosure and recoup their losses.

LTV ratios are also significant when evaluating your mortgage insurance payments. For conventional loans, if you make a 20% down payment, lenders may waive private mortgage insurance (PMI) requirements. Conversely, for FHA loans, borrowers must pay a minimum down payment of 3.5% to have their mortgage insured.

Understanding the loan-to-value ratio is crucial when navigating the mortgage process, as it can impact your loan terms and overall borrowing costs.

Jumbo Loan

Jumbo loan is a mortgage that exceeds Fannie Mae and Freddie Mac limits. It’s ideal for buying expensive homes if you have a large down payment and good credit.

Conventional Loan

Conventional loans come from lenders not backed by the FHA. Because they carry more risk, they often need larger down payments.

Loan Approval

Your loan is approved when lenders officially grant you a mortgage based on the information you provided in your loan application.

Equity

Home equity is the portion of your home that you own. It increases as you make mortgage payments, showing you own more of the property over time.

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