Monday May 22, 2017

Loan to Value Ratio

When you apply for a mortgage, one of the factors which the lender will consider before granting you a loan is your loan to value ratio.

Your loan to value ratio is equal to the amount of the mortgage divided by the appraised value of the property that you want to buy.  The resulting number is a percentage and the higher the percentage, the less likely you are to get the loan.

As an example, let’s say you want to buy a home which is currently valued at $300,000, but you are going to need to purchase a mortgage equal to $246,000.  The resulting percentage is 82%.  This is a pretty high percentage and most lenders won’t surpass 80% loan to value ratio when considering a customer for a home loan.

If you need to borrow more than 80% of the home’s value in order to purchase it, you are seen as a very high risk investment and that means you can have an extremely difficult time getting a loan if your LTV is too high.

How can you get around this problem?

Fortunately your LTV ratio isn’t the only factor which banks use in determining whether to give you a loan.  Obviously a good credit score is a plus, as is a steady income.

Having a high income to debt ratio can really help you out—this means that your monthly income is much higher than your monthly bills.  If you can prove that you are financially stable and should be for the foreseeable future, there’s a much better chance that you’ll be considered for a loan, even with a poor LTV ratio.

You may also be able to get a loan with a poor LTV ratio if you are willing to pay the price in the form of higher interest.  If a lender thinks that you can compensate for your risk through providing a higher amount of profit in the long run, this may make the lender more willing to consider you.

If you can get the government to insure your loan through a first time homeowner’s policy, this may help you get the loan too.  You’ll be required to get mortgage insurance, too, so keep this expense in mind.  It can cost you up to a couple hundred dollars a month, depending on how expensive the property you want to buy is and how big a loan you need.

Another way around having a poor loan-to-value ratio is to simply look for a less expensive house in the first place.  Even though you may have your heart set on a particular dwelling, it wouldn’t do to actually manage to procure the loan only to find that you never can fully surmount the enormous cost of the home.

And if you are only looking for a temporary abode, there is no reason at all to justify a situation where you’re going to be losing a lot of money through high interest and the high cost of mortgage insurance.

By choosing a home which costs less money to begin with, you not only will be in a more stable situation if you can get the loan, but you’re more likely to actually get it to begin with.  Your loan to value ratio will automatically be lower, and if you can get under that 80% threshold then you’ll be considered much more seriously by a lender.

There are many beautiful homes available at rock bottom prices these days, especially in select rural areas, so look around before you make up your mind.  You may be surprised at what you can afford!

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