All mortgages have guidelines and restrictions that lenders must follow. Some lenders or financial institutions may even add their own rules to what is already in place in order to protect themselves from unacceptable loans. One of these restrictions is called loan to value. It is to the benefit of the borrower that they know what the required loan to value of a mortgage is and how it affects them.
One part of qualifying for a mortgage requires that the lender’s conditions be met regarding the value of the property. The value is determined by an appraiser who provides the fair market value of the property after examination. Lenders then calculate the loan to value ratio which is a vital part of qualifying. The loan to value ratio is computed by dividing the mortgage amount by the value of the property. The resulting ratio tells the lender the percentage of the loan and the percentage of equity in the property. For example, if a home is valued at $100,000 and the loan is $80,000 then the loan to value ratio is 80/20; the loan is 80% and the equity is 20%.
Types of required loan to value of a mortgage ?
Different types of mortgages have different requirements for loan to value ratios:
– Conventional loans typically require a loan ratio of 80%, however, some lenders may require 78% or lower. If other factors of the loan requirements are met, lenders may approve a loan above these requirements, but the borrower will need to pay private mortgage insurance until the mortgage is paid down to an acceptable level, 80% or below depending on the lender.
–FHA loans are available for borrowers who do not have enough cash to meet the requirements of conventional loans. The FHA loan requirement for a home purchase is 96.5%, which means that the borrowers must have a down payment of at least 3.5%. The borrower is also required to pay an upfront mortgage insurance premium which is part of the initial closing and an annual mortgage insurance premium.
–VA loans, which are for veterans and military service members, are less restrictive and allow for 100% financing. This means that there is no down payment required from the borrower. However, a one time VA funding fee is charged to the borrower at part of the closing.
–USDA loans also offer 100% mortgage financing. However, these loans are restricted to certain areas of the country.
While these are the most common types of mortgages and the required loan to values, there may be special programs within each type that has a lower down payment requirement. For instance, there is the HUD $100 program which allows the home purchase of a HUD foreclosure with a down payment of $100.
Even though the loan to value ratio of a mortgage is a very important part of measuring the lender’s risk of the loan, it is only one of the many components that will assist with determining the qualifications of the borrower and whether an approval will be granted. It is for this reason that home buyers will often be encouraged to save as much as possible for a down payment prior to making a home purchase.
Rosemary Rugnetta has been writing since 2010 for FreeRateUpdate.com, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, certified mortgage underwriter, loan processor and property manager.