You might hear the term loan to value or LTV is used a lot when you're searching or applying for a mortgage. This might even be the deciding factor in your mortgage approval. What exactly is loan to value (LTV) and how would it affect your next mortgage?
loan to value ratio is the amount of loans for the purchase price or appraised value, whichever is less. You can easily calculate loan to value by dividing the loan amount of the sales price or appraised value, as shown in the example below:
Estimated value: $ 500,000
Loan Amount: $ 400,000
$ 400,000 / $ 500,000 is 0.75 or 75% loan to value.
As you can see, it is very easy to calculate loan to value and it is also very important, because the main characteristics of a loan that is used to asses the risk mortgages. If LTV is too high, you may not get the loan you had hoped. If LTV is too low, it really does not have a negative impact. Lenders prefer low LTV loans, because if you should default on your mortgage, the lender has a very good chance of recouping their investment if the house is taken on. All hope is not, of course.
Most people are interested in the maximum loan to value or loan to value on which you do not have to pay mortgage insurance. In the case of conventional mortgage, the LTV must be 80% or less, so you do not have to pay mortgage insurance. In the case of FHA mortgages, regardless of the LTV has to pay a mortgage insurance premium on FHA mortgage for at least 5 years.
conventional loans allow the LTV is 95% unless it is an area where property value is declining. FHA purchases to allow LTV of 97% and 95% on cash out refinance.