The mortgage industry has its own special set of terms and abbreviations. Whether you're buying your first home or if you're on your fifth property, understanding the meaning of the terms will help to make your mortgage loan application process flow more smoothly. The resulting LTV on a mortgage loan is the acronym for the loan-to-value ratio. Paying more or less of a down payment causes the value to increase or decrease.
Any time a mortgage loan is taken out against a property, the lender will require an appraisal to determine the property's value. Lenders use licensed appraisers in the area your property is located for the appraisal services. The appraiser physically tours the property, viewing both the inside and outside, and notes the size, building materials and updates. He also reviews the recent sales of other homes in the area of comparable size and features to assign a fair value. The appraised value is commonly called the fair market value because that is the price the property can be expected to sell for on the open market.
The LTV ratio is a figure that lenders use to assess the risk when approving loans and also when determining the interest rate they'll offer. The LTV is a simple ratio, determined by dividing the loan amount by the property's assessed value. For example, you want to buy a home that costs $200,000 and you have $40,000 to put toward the down payment. Your mortgage loan amount would need to be $160,000, creating a resulting LTV of 80 percent.
Lenders take your down payment amount into careful consideration when reviewing your loan application. If you're able to make a bigger down payment, you'll probably receive a lower interest rate than average because mortgage lenders associate lower LTVs with lower risks. Prior to the housing market crash in the 2000s, some lenders would loan up to 125 percent of the property's value. However, in today's market, conventional lenders prefer down payments of at least 20 percent.
Private Mortgage Insurance
If you have good credit and earn enough income to support your estimated monthly mortgage payments, but don't have enough cash to make a 20 percent down payment, many lenders will still approve your mortgage loan application. However, there is a catch: You'll be charged for private mortgage insurance. PMI is a policy that protects the lender for the loan amount in the event that you default on payments. The cost of PMI typically averages 0.5 percent of your loan amount per year, and is paid in monthly installments in addition to the mortgage payment. Except FHA, most lenders will allow you to cancel the PMI after you've paid down the loan balance to a resulting LTV of less than 80 percent.