Loan to Value Considerations
What is the Loan to Value or LTV?
Loan to value, or LTV as it is commonly referred to, is the
ratio of Loan Amount to the Value of a property. For example,
a loan of $200,000 on a property valued at $400,000 is at an
LTV of 50%. LTV
considerations become important in several situations.
Purchase loans
When a property is purchased, the down payment is critical
to the lending decision. When the down payment is less than
20%, i.e. the LTV is greater than 80%, a lender will generally
require mortgage insurance. This requirement also means that
the loan will usually require an additional level of approval,
from a Private Mortgage Insurance Company. Mortgage insurance
coverage, or PMI, is a premium or fee which is included in the
monthly mortgage payment. It can range from .22% to almost
1% of the loan amount annually, with the exact coverage
determined by the loan type, insurance company, and LTV.
Mortgage insurance payments are not tax deductible.
An alternative to obtaining PMI is to structure the purchase
transaction to include a first and second mortgage, thus bypassing
the need to have the additional mortgage insurance premium.
Refinance
In a refinance transaction, the ratio of loan amount to
appraised value is taken into account in a similar way.
Especially when
a borrower wants to obtain cash out in a transaction, the
typical rule is a maximum of 75% of the appraised value for
the total loan
amount, including any cash out. There are lenders who will
go beyond the 75% limitation, however the loan products and
interest rates offered are generally not as competitive. Rate
and term refinances, or borrowing the current loan amount plus
applicable closing costs, can go up to 80% without requiring
Mortgage Insurance. Again, at 80.01% or greater the new lender
will demand mortgage insurance.
When combining a first and second mortgage in a refinance
transaction, bear in mind that most lenders will require
that the second loan be "seasoned" for a period of time,
generally 12 months. If the second is not "seasoned" the
lender will view the consolidation of the first and second
mortgages as a cash out refinance loan, subject to the
lower LTV guidelines.
Overall, the lower the ratio of the loan amount to the value
appraised, the more favorably a lender views the risk of the
loan.
Loan to value considerations also will differ in owner occupant
versus rental or non-owner situations.
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