Understanding Key Terms: DTI, LTV, PMI, and MI Explained
When obtaining a loan for a home purchase, you will be dealing with lots of terms that relate to important numbers, and figures that will affect your loan approval. Before you get approved, it is vital that you understand these terms, and how they will impact your loan. We’ve already gone over what DTI is (see last entry), and now we will go over what Loan To Value, or LTV, means.
LTV: Loan to Value Ratio
Whether you are purchasing or refinancing a loan, the LTV will be used by the lender to determine loan approval. The LTV is the percentage that reflects the loan amount compared to the current market value of the property. The key element when determining the LTV is the amount the home appraises for. In some cases, a property can appraise for less than the sales price. In this case, the lender will require the loan amount, and the appraised amount to line up with one another. To calculate the LTV, you divide the appraisal amount by the loan amount after down payment.
Loan Amount / Appraised Amount = LTV
If you are purchasing, nowadays, almost every loan program requires a down payment. If you are going conventional, the down payment requirement can be anywhere from 5% to 30% of the purchase price. If you are using an FHA loan, you will need a minimum of 3.5% down payment. Let’s take a look at a few examples.
Scenario #1: FHA buyer putting 3.5% down
Appraised Amount: $350,000
Down Payment: $12,250
Loan Amount: $337,750
$337,750 / $350,000 = 96.5% LTV
Scenario #2: Conventional Buyer putting 20% down
Appraised Amount: $550,000
Down Payment: $110,000
Loan Amount: $440,000
$440,000 / $550,000 = 80% LTV
Again, the LTV is one of the most crucial terms to understand when obtaining a loan to purchase, or refinance a home. If you have more questions, do not hesitate to contact your mortgage professional! We loan officers love it when clients take an interest in their loan, and ask lots of questions!
If you have questions regarding a home loan, or how much you can be pre-approved for, visit my website at www.AlissaAlvarez.com