Loan To Value
Loan-To-Value Ratio is commonly referred to as LTV. The LTV is the relationship between the amount owed on the mortgage and the appraised value (or sale price if it is lower) of the home. A $100,000 home with a $90,000 mortgage, for example, has an LTV percentage of 90%. The remaining balance must be paid with a down payment. In the example above, the required down payment would be $10,000 (or 10%).
Conventional loans require private mortgage insurance (PMI) for borrowers with an LTV ratio of more than 80% (less than 20% down payment). Private mortgage insurance is not tax deductible, even though it is included in your monthly mortgage payment This insurance premium is lower if your LTV is slightly above 80%, and more expensive the higher your LTV. A knowledgeable Loan Officer can creatively finance your loan, so that you can avoid PMI, and possibly have tax benefits as well.
All FHA loans require mortgage insurance. The mortgage insurance charge for FHA loans is .5% per year of the loan amount and is charged to the borrower every month. FHA loans will also require an upfront mortgage insurance premium of 1.5%.
VA loans, on the other hand, do NOT require PMI. In fact, lenders are prohibited from requiring private mortgage insurance on VA loans. However, borrowers are required to pay a one-time funding fee on VA loans.
If you only need a mortgage of 70% or less of the sale price of the home, your approval process will be relatively easy, and you should be able to get a slightly better rate.
If you need a mortgage from 71-80% of the sale price of the home, your process should still be relatively simple. You may need to obtain more financial records than if your mortgage was less, but you should be free from the mortgage insurance requirement.
For a mortgage from 81-90%, lenders will require private mortgage insurance (PMI) as well as more detailed financial information. The private mortgage insurance may be discontinued on once the LTV ratio reaches a certain point.
If you require a loan of 95-100% of the purchase price of your home, an FHA loan, or a VA loan (if you qualify), may be a good choice. You can also check with your Loan Officer and they may be able to help you creatively finance so that you can avoid PMI.
In aggressive markets, some lenders will offer loans totaling 110-125% of the purchase price of the home. Rates on these loans may be likely be substantially higher than conventional loans. Check with different lenders to get the current rates on these types of loans
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