Know The Truth About Loan To Value
If you want to know about mortgage banking industry, it is essential to know some important facts and figures of the business. So equip yourself with some important definitions and statistics of this financial globe.
What Is Loan To Value Or LTV?
In simple terms, the Loan to value is the ratio of mortgage amount to the purchase price of a property. LTV of a new purchase is calculated by dividing the appraised value by the down payment. For example if you are to buy a property for US $ 16,0000 and have to pay US$ 12,0000 as down payment then the LTV ratio will be 75%.
The lenders use this ratio to evaluate the risk in their lending money to the borrower. It is like a safeguard for the lenders to protect them from lending excess money than the property's worth. Usually a lender will do an appraisal of the property to calculate the LTV. Generally checking the prices of comparable properties within one-mile proximity will be enough but in some cases a direct or what we call a walk-through appraisal may be required.
For the consumers, LTV is vital because it will determine the interest rate on the payback of the loan. The lower the LTV lower will be the interest rate. And there are specific guidelines resting on the loan to value ratio the creditor will follow and if you cannot match these criteria you will be denied mortgage.
The loan to value ratio is important as you will be required to buy mortgage insurance premium or Private Mortgage Insurance (PMI) on loan to value amounting more than 80%. The lenders consider high loan to value mortgages as bigger risks. Though the lender and the insurance company are the decisive factors for the premium amount it can be even 1% of your loan amount.
There can be many mortgages on a property. The first mortgage is primary and the second mortgage is the subordinate because if you default on payment, the first mortgage would be paid off first then will come the turn of a second mortgage. So typically you have to cough up more money as second mortgages carry the baggage of higher interest rates.
There Are Several Types Of Second Mortgages
The most common is the borrowing of amount as per the equity the homeowner has on his or her home. If for example the value of the home is US$ 190000 and the amount due in the first mortgage is US$ 70000 then the second mortgage amount that can be borrowed will be US$ 120000. This is a mortgage secured against collateral so is less expensive.
Another is the line of credit second mortgage where the borrower does not take out cash but applies for a line of credit secured against his or her property, which can be used, as and when the need arises.
In some cases borrower can take the second mortgage loan at the same time with the first mortgage to qualify for a purchase.
If you have a super credit score you can get a second mortgage that exceeds the value of your home.
The Equation Of LTV And Second Mortgage
The Loan to Value or LTV is a crucial determinant of the amount a lender is willing to transfer to a borrower who wants to get a second mortgage or home equity line of credit. In this case, the maximum amount the borrower can get as loan is the difference between the price of the home and the value due on the primary mortgage.
What Is Mortgage Insurance (MI)?
Mortgage insurance is the added payment imposed on the borrower with a high LTV ratio to assure the lender in case the borrower defaults in paying back his or her first mortgage loan. If the LTV ratio exceeds 80% you will require Private Mortgage Insurance (PMI)
Instructions To Follow In The Course Of Getting A Loan
While borrowing from the lender refer to this number, say that you want to borrow with a LTV of 75%
- First calculate the value of the property taking the purchase price of the property, say this amount is US$ 16,0000
- Subtract your down payment say US40000
- Assess your loan amount, here US$ 120000
- Now divide your loan amount by the purchase price, which is 0.75% or 75%, this is your loan to value ratio
For A Second Mortgage Route
The American Guideline On LTV
- First you have to appraise your property to assess the value of your home.
- Find out your due amount of the primary mortgage from the most recent loan statement. This is the loan figure in the equation.
- Now to get the LTV divide the loan figure by the value amount
In the US, the loans that comply with Fannie Mae and Freddie Mac underwriting guidelines limits the LTV ratio to maximum 80%. If the loan to value ratio crosses 80%, it becomes a subject under private mortgage insurance. The individual mortgages, properties that have more than one mortgage lien like the stand-alone seconds and the home equity lines of credit (HELOC) are under the combined loan to value or CLTV criteria.
So with the fundamental knowledge on mortgage finance you can deal with your property more lucidly.-------------------------------------------------------------------------------------------------------- If you are a business owner get listed at Best Finance Site, part of Localwin Network.