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Down Payment Requirements For A Mortgage Approval

Mortgage Down Payment in DallasA common question we are often asked is what amount of down payment will be required to obtain a mortgage loan approval?

Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and mortgage program you may qualify for.  It will also determine if the loan has mortgage insurance and escrows.

Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.

Simply put, LTV is a calculation of the amount of equity in a property compared to the loan amount.

What Is Loan-To-Value (LTV)?

The LTV Ratio is calculated as follows:

Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio

*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.

For Example:

Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment.

If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.

$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%

In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.

Since the above example was an FHA loan let’s talk for a moment about the FHA 203k renovation loan.  The 3.5% down payment in this instance would be based on the total loan amount inclusive of the renovation funds that will ultimately be set aside in escrow.

On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.

Again let’s talk for a moment about the mortgage insurance on a conventional renovation loan such as the Fannie Mae HomeStyle loan.  The down payment is based on the total loan amount which will include the funds for renovation.  For those putting down 5% they will be at a 95% loan to value and will need mortgage insurance however unlike FHA’s mortgage insurance you will only be required to carry it until the LTV reaches 78%.  Since some of these newly renovated homes are in great equity positions there is a chance you won’t have to carry it for long.

Lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage. Also, with a lower LTV the lender will lose less money in case of a foreclosure.

Call me today and let’s talk about your specific needs.  We can structure a conventional, FHA, VA, Jumbo or Renovation loan to meet your current needs.  Once pre-approved we can also pair you with a Realtor…All FREE of charge!!

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