The Importance of the Loan-to-Value Ratio

Are you looking to apply for a Florida home loan? If so, lenders will want to know what portion of the value of the home you wish to finance. In other words, they want to know how much of a down payment you are going to be making in relation to the overall cost of the home. This percentage is known as the loan-to-value ratio (LTV).

To calculate the LTV, you divide the total amount of the mortgage by the appraised value of the property:

Mortgage ÷ Appraised Value = LTV

This percentage is important to lenders because the higher your LTV, the lower your home equity. Borrowers with low equity are viewed as having a greater risk of defaulting on their Florida home loan.

As a general rule, lenders require those who take out a mortgage with an LTV greater than 80 percent, to pay for private mortgage insurance. This protects them in the event a borrower defaults by ensuring that the outstanding balance of the Florida home loan will be paid off.

Florida home loan officers may also charge a higher interest rate on high LTV loans than on loans where the down payment is at least 20 percent. They also may require a second appraisal of a property before they will approve the loan.

To avoid these pitfalls, it’s a good idea to keep the LTV in mind when searching for a home. Begin by getting pre-approved for a Florida mortgage before you go house hunting. This enables you to calculate how much you can afford to spend by determining your debt-to-income ratio.