Tuesday, December 10, 2013

What is LTV?


Simple Definition : Loan-To-Value (LTV)

In the world of mortgages, Loan-to-Value (LTV) is the amount of money you're borrowing as a percentage of your home's value.
Lenders use loan-to-value calculations on both purchase and refinance transactions. The math to determine your LTV may vary based on loan purpose, however.  
With a refinance, the LTV is equal to your loan size divided by your home's appraised value. For a purchase, LTV is based on the sales price of the home, unless the home appraises for less than its purchase price. When this happens, your home's LTV is based on the lower appraised value -- not the home's purchase price. 
Here are four simple examples to illustrate the concept of loan-to-value :

Buying a Home which appraises for more than its Purchase Price

  • House price: $100,000
  • Appraised value : $110,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • Loan-to-value (LTV) : 80%

Buying a Home which appraises for less than its Purchase Price

  • House price: $100,000
  • Appraised value : $90,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • Loan-to-value (LTV) : 89%

Refinancing a Home with no Second Mortgage

  • Home value: $100,000
  • Loan balance: $80,000
  • Equity: $20,000
  • Loan-to-value or LTV: 80%

Refinancing a Home with a Second Mortgage

  • Home value: $100,000
  • Loan balance: $80,000
  • Second loan balance : $10,000
  • Equity: $10,000
  • Loan-to-value or LTV: 90%
Whether you're buying or refinancing, though, your loan's loan-to-value is important because it helps to determine your mortgage rate and your loan eligibility.

High LTV Loans For Home Buyers

Loan-to-value is a key factor in your ability to get approved for a mortgage. In general, lenders prefer loans with low LTV because loans with low LTV represent less risk to the bank. 
That said, there are a number of loan programs specifically geared toward homeowners with high LTVs. There are even some programs which ignore loan-to-value altogether.
Here is a brief review of the more common high-LTV loan types.

VA Loan : Up to 100% LTV allowed

VA loans are loans guaranteed by the U.S. Department of Veterans Affairs. VA loan guidelines allow for 100% LTV, which means that no downpayment is required for an VA loan. VA mortgages are available to certain active-duty military servicepersons, veterans, military spouses, members of the Selected Reserve or National Guard, cadets at the U.S. Military, Air Force or Coast Guard Academy members, midshipman at the U.S. Naval Academy, World War II merchant seamen, U.S. Public Health Service officers and National Oceanic & Atmospheric Administration officers, among other groups.

USDA Loan : Up to 100% LTV allowed

USDA loans are loans insured by the U.S. Department of Agriculture. USDA loans allow for 100% LTV -- there is no downpayment required. USDA loans are sometimes known as Rural Housing Loans but it's a misnomer, of sorts. USDA loans are available in rural parts of the country, but they're available to many suburban homeowners, too.

Conventional 97 : Up to 97% LTV allowed

Fannie Mae offers a special mortgage for homeowners with above-average credit scores called the Conventional 97. Via the Conventional 97 program, home buyers can make a downpayment of just 3 percent with access to below-average mortgage insurance rates. The program also allows for cash downpayment gifts.

FHA Loan : Up to 96.5% LTV allowed

FHA loans are loans insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD). FHA mortgage guidelines require a downpayment of at least 3.5 percent. Unlike VA and USDA loans, FHA loans are not limited by military background or location -- there are no special eligibility requirements. FHA loans can be an especially good fit for home buyers with less-than-perfect credit scores, or for loan sizes over $625,500.

Conventional Loan : Up to 95% LTV allowed

Conventional loans are loans guaranteed by Fannie Mae or Freddie Mac. Both groups offer 95% LTV purchase mortgages, which means you will need to make a downpayment of 5 percent to qualify. 95% loans are available via most mortgage lenders, and private mortgage insurance (PMI) is often required. As compared to an FHA loan, conventional loans to 95 percent LTV are advised for homeowners with high credit scores only. In most other cases, FHA loans are preferred.

High LTV Loans For Refinancing Households

High-LTV mortgages are simpler for refinance transactions as compared for purchase ones. Multiple federal agencies make "no appraisal" refinance programs available to U.S. homeowners which means that loan-to-value is a non-factor for eligibility.
A few of those programs are highlighted below. 

The HARP 2.0 Program

The Home Affordable Refinance Program (HARP) was first launched late last decade. Also known as "The Obama Refi", HARP is available to homeowners with existing mortgages backed by Fannie Mae or Freddie Mac. HARP was revamped in 2011 as "HARP 2.0" and the latest iteration allows for unlimited LTV. No matter how little equity you have in your home, you can be HARP-eligible.

FHA Streamline Refinance

The FHA Streamline Refinance is a special refinance program made available to homeowners with existing FHA mortgages. Official guidelines for the FHA Streamline Refinance waive appraisal requirements, which means that loans with unlimited LTV are allowed. Guidelines also state that income, employment and credit are not required to be verified.

VA Streamline Refinance

The VA Streamline Refinance is a special refinance program for homeowners with existing VA home loans. The official name of the VA Streamline Refinance is the Interest Rate Reduction Refinance Loan (IRRRL). It's sometimes called the VA-to-VA loan. Similar to its FHA cousin, the VA Streamline Refinance does not require an appraisal, nor does it require the verification of income, employment or credit.

USDA Streamline Refinance

The USDA Streamline Refinance is available to homeowners with existing USDA mortgages only. Like the FHA and VA streamline programs, the USDA refinance waives the need for a home appraisal. The program is currently in pilot phase, and available in 19 states. 

To receive personalized rates please email me at eneal@athccorp.com with your available times to discuss your options.