WHAT IS LTV
LTV stanads for loan-to-value and it’s one of the first financial terms you’ll hear related to borrowing for a home. The LTV is key information that a lender uses to compare the amount of the home loan you’re requesting and the home’s appraised value. Low or high, don’t let this number scare you. Borrowers and lenders like Sierra Pacific Mortgage succeed every day in making good loans happen. So, let’s learn about LTV.
LOW & HIGH LTV
A low LTV is desirable. It tells your lender that you have made a solid financial commitment to the home with a solid down payment. A low LTV suggests less risk of your not being able to pay your loan payment (default). It means you’ve laid the groundwork for being an attractive borrower who will keep up on your commitments to homeownership.
A high ratio is not unusual. It means that your down payment may be lower and so you begin the process with less equity. A higher ratio simply tells lenders and others whether Private Mortgage Insurance (PMI) is required so that if payments falter, the lender is insured against loss. Not to worry though, Private Mortgage Insurance is very common, especially when a down payment is less than 20%.
For you, the homeowner, the LTV ratio tells you how much equity you have by comparing how much you owe to the value of the home. To estimate your LTV, divide the loan amount by your home’s purchase price.
WHY DOES IT MATTER?
Lenders rely on LTV to determine how much they can reasonably lend you, at what rate, and with or without PMI. For example, many loans call for a 20% down payment so the lender is providing a loan to
cover 80% of the property’s value. FHA loans allow for a lower down payment and an LTV up to 96.5%. Sierra Pacific Mortgage has a wide variety of loan programs and can help you determine which one fits your needs best, and then guide you through the process.
THE BIG PICTURE FOR BEGINNERS
LTV ratios are important, but they don’t give the whole picture. Other considerations include your credit scores. Good credit makes it easier to get a higher LTV loan. Another factor is your monthly income and whether it’s adequate to make monthly payments. Finally, because mortgage lenders appreciate lower risk loans, they often offer lower interest rates and/or costs for a lower LTV (more equity). The lower the interest rate is, the lower your monthly payment could be.
THE BOTTOM LINE…
Whenever you hear a finance term that you’re not familiar with or don’t understand, Sierra Pacific Mortgage wants you to reach out for answers and information. The more you understand the borrowing process, the easier it will be to take it on. We want to make you comfortable and confident in all of your decisions.