What’s the Low Down on Loan to Value?
Itâ??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, itâ??s mostly in relation to avoiding paying monthly mortgage insurance. But sometimes, a loan to value can affect even more aspects of your loan â?? like pricing and approval!
What is loan to value? Well, itâ??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 â??LTVâ? is 50%. Itâ??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 LTVâ??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% LTVâ??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 youâ??re refinancing the home you live in? The whole grid of acceptable LTVâ??s changes for the most part, with a few exceptions. And furthermore, if youâ??re talking about investment properties, itâ??s another can of worms.
