As soon as you begin speaking with lending professionals about your home loan options, loan-to-value will inevitably become part of the conversation. Loan-to-value, or LTV, is the loan amount requested divided by the lesser of the sales price or the appraised value. Each loan program has a maximum LTV, such as 80 percent or 95 percent. When you multiply the lender’s maximum LTV by the property’s sales price or appraised value, you come up with the maximum loan amount that the lender can offer. Of course, other factors come into play as well. These include the down payment amount available and your financial qualifications.
LTV and Home Purchases
LTV can impact your property selection process, so you should learn about LTV requirements upfront before you start touring homes. This is because the LTV requirement also tells you how much money is required as a down payment. For example, a loan program with an 80 percent maximum LTV has a 20 percent minimum down payment requirement. For many homebuyers, the funds available for a down payment and closing costs are relatively fixed. Because of these factors, the lender’s LTV requirement combined with your available down payment will determine the maximum sales price that you can consider.
LTV and Mortgage Refinances
Loan-to-value also plays a role in refinances. The LTV in a refinance is calculated by dividing the desired loan amount by the property’s current appraised value. With a refinance, the new loan amount generally must cover the payoff amount for all existing mortgages. Therefore, you can use the LTV to determine if you have enough equity in the home to qualify for a refinance and if you could potentially pull cash out of your home by refinancing.
The maximum LTV allowed by different loan programs vary, and it could be limited by other factors. For example, applicants with a lower credit score may only qualify for a loan program with a lower LTV. To learn more about LTV and how this ratio could impact your upcoming purchase or refinance plans, contact your loan rep today.
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