What’s the Low Down on Loan to Value?
It’s not very often that a borrower takes into heavy consideration what his loan to value is when shopping for a loan. In fact, if the subject is brought up by the customer, it’s mostly in relation to avoiding paying monthly mortgage insurance. But sometimes, a loan to value can affect even more aspects of your loan – like pricing and approval!
What is loan to value? Well, it’s exactly what it says. The loan amount compared to the value of the home you are buying or refinancing. For example, if you are buying a $100,000 home, and your loan amount is only $50,000, your loan to value or “LTV” is 50%. It’s also very common to refinance a home to obtain a lower LTV and drop mortgage insurance that was before required.
Different types of loans have different minimum requirements for LTV’s. With primary residence purchases, for instance, an FHA loan can have as high as a 97.75% LTV (soon to change to 96.5% in 2009). A conventional loan can have as high as a 97% LTV (but more common is 95% LTV). VA and Rural Housing loans can have 100% LTV’s. People who have cash to put down on the property they are buying and financing with a conventional loan oftentimes try to amass 20% of the purchase price in order to avoid mortgage insurance. Mortgage insurance is required when your LTV for a primary residence is above 80% and is issued by independent mortgage insuring companies like Genworth Financial or PMI. Fannie and Freddie, the big purchasers of conventional loans, will require one of these or other approved companies issue mortgage insurance unless the loan has an 80% LTV. And if you’re refinancing the home you live in? The whole grid of acceptable LTV’s changes for the most part, with a few exceptions. And furthermore, if you’re talking about investment properties, it’s another can of worms.
But when else does LTV mean something? Consider when a loan specialist prices your loan. Oftentimes there are pricing differentials based upon the loan to value. For instance, if you carry mortgage insurance and your LTV is 85.01% or higher, you might actually get a better interest rate than if you had an 85% LTV (but don’t get too excited because your monthly mortgage insurance will be higher). Or if your LTV is 60% or lower, you might also get a better interest rate. If you are close to tipping the scales on one of these ratios, it may be to your benefit to ask your loan specialist how close you are to a pricing break one way or another. You’d be surprised to find out it might change your mind as to how much money you decide to put down on your loan.
And guess what else? A low loan to value may be the difference between loan approval and loan denial. Why is that? Because if you are investing enough of your own money into the equity of a property, chances are you won’t default on the loan. And if you do, it’s probably a last recourse. Not to mention, the lender who holds the note won’t lose money because there is enough equity in the property to cover foreclosure costs, re-sale costs and any value loss from an upside down market. The lender is covered. So, the lender will consider the loan less risky and a higher debt to income ratio is tolerated when reviewed with a high credit score.
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Posted on January 6, 2009 | Under Finance Home Loan | 6 Comments
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6 Responses to “What’s the Low Down on Loan to Value?”
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Yes, it is possible to do a short sale Refi. I would speak with your current lender to explore a forbearance as well. If you have genuine hardship, they will work something out with you. Do some research and find a reputable loan officer in your area with alot of expirience if you decide to go the refi route.
Call your current lender and see what they can do for you. If you are a good client they may offer you a deal you can't refuse.
To refinance you will need a new appraisal and you may or may not have enough equity. However try your current lender before you do anything.
when you finance a new car your are upside down as soon as you drive it off the lot.
Best you can do is sell the car on a private sale and get a personal loan for the difference in the selling price and what you owe.
Depeding on the terms of your loan, you can actually refinance as soon as 6 months. The best thing to do is to call your mortgage loan holder(s) and just ask!
It depends on what your interest rate was and how much your house went down. If the house went down more than a couple of thousand, you will probably have to pay cash to refinance. The first 5 years of a mortgage you pay off almost nothing. You can use this link to figure out how much you owe on your house, but you should also have been given this as part of the closing process, so you can look it up in your paperwork: http://www.bankrate.com/brm/amortization-calculator.asp
FHA requires only 2.25% down payment. I found interesting information about your answer & the best options here.
http://all-mortgage-calculators.blogspot.com/2007/07/mortgage-loans.html
Good luck!