Loan to Value (LTV) Ratio?
As a Realtor®, it is so important to know and understand the type of loan your homebuyer will be using. Otherwise, the contract of sale will likely not be drafted in such a manner to protect your homebuyer’s best interests. It is simply not enough to receive a pre-approval letter from the lender. Exercise your due diligence and make sure you know the type of loan and terms associated with the loan or you may be wasting your buyers (and your own) time.
One example I use in my classroom is concerning a young man that came to see me about purchasing a home. As always, I asked him if he had already applied for a loan. Much to my surprise, he said he did and had a pre-approval letter in his hands for $150,000. I then asked if he knew the terms of the loan and he replied that he had been told he could buy any house up to $150,000. I called his lender and learned that he was pre-approved up to $150,000 with a 90% Loan to Value (LTV) ratio. After hanging up with the lender, I asked the buyer how much money he had to put down on his new home. He said if he had to put money down, he felt comfortable putting $5,000 down on the home. I told him the most he could buy a house for is $50,000, which was very confusing to the buyer. You see, the LTV ratio is critical in knowing what one can buy. With a 90% LTV ratio, that means the bank will loan 90% of the purchase price and the buyer will have to put 10% as a down payment. What a huge waste of time this would have been to all involved if we had made an offer based solely on the pre-approval letter.
Down payments can be one of the biggest concerns for homebuyers today. Therefore, the type of loan program will typically be decided by the amount of money available for down payment as well as credit report/history. There are four common loans a homebuyer can choose from today with varying degrees of LTV ratio’s.
1. Conventional Loans have a 95% LTV ratio. However, if a buyer only makes a down payment of 5%, they will likely have to pay Private Mortgage Insurance (PMI). PMI will be paid until the buyer has accumulated 20% equity in the property.
2. FHA loans have a 96.5% LTV ratio, which requires 3.5% down payment. Since these are Government Insured loans, you will likely have to pay Mortgage Insurance Premiums (MIP).
3. VA loans have a 100% LTV which requires no down payment. This is a Government Guaranteed Loan. The government will guarantee the first 25% of the loan amount, up to $104, 250. Lenders will typically be willing to loan up to four times the guarantee, or $417,000, since they basically get 25% equity in the property with the Governments Guarantee. The Government Guarantee eliminates the need for PMI or MIP.
4. USDA loans also have a 100% LTV. However, one can only get this loan for the purchase of a home in a rural area. You will have to check with your lender to determine if the home you are considering is listed as a rural property. Although you will have to pay PMI with this loan, it is very cheap as compared to Conventional loans. One can expect to pay around $12 per month for every $50,000 in loan amount.
It is vitally important for homebuyers to use a Realtor® that understands the types of financing and which loan type will best suite the buyers circumstances as well as having a very knowledgeable loan officer. I always suggest talking to two or three loan officers to see which one can get you the best deal. I also suggest you use a local lender that you can actually go see and talk to. Most on-line lenders are out of state and often times very difficult to get answers or help from in a timely manner. When discussing finance or re-finance with a loan officer, you will do well by including Erica West, with New American Mortgage, as one of those you speak to. Erica West is an expert in financing as well as down payment assistance programs. Erica may be able to get the down payment you need at no cost to you. Give Erica West a call at (803) 528-5019.
If you are considering a Real Estate License to start a new career or even to make some money part time in Real Estate, we would love to help you become a Successful Real Estate Agent at the Real Estate School for Success. We have classes for any type of license you would be interested in to include, a SC Real Estate License, SC Appraisers License, SC Property Managers License or SC Home Inspectors License. You can also receive a 15% discount on any class by entering the promo code below when you register on line at the Real Estate School for Success.
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