Understanding the loan-to-value ratio (LTV)
On the lender’s receipt of a mortgage application, the property is appraised.
The appraisal determines whether the property is of sufficient value to support the amount of financing the buyer requests. Essentially, the lender uses the appraisal to gauge whether the loan-to-value ratio (LTV) meets the lender’s standards.
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Generally, an acceptable LTV for conventional mortgages is 80% of the property’s value, requiring the buyer to make a minimum 20% down payment. A greater LTV compels the lender to require the buyer to obtain private mortgage insurance (PMI).
Once a lender approves property based on an appraisal, a mortgage package is assembled and sent to a mortgage underwriter for review.
A mortgage approval issued by a lender is often conditioned on a buyer providing more information or taking corrective actions. For example:
- the physical condition of the property may need correction;
- title may need to be cleared of defects;
- derogatory entries on the buyer’s credit report may need to be eliminated; or
- the buyer’s long- or short-term debt is to be reduced.
Once conditions for funding are met and verified, the mortgage is classified as approved. Escrow calls for mortgage documents and funds, and on funding, the sales transaction is closed.
Agents need to remind themselves that the degree of risk each lender finds acceptable is different. More often than not, a lender exists who will make a mortgage of some amount and under some conditions to nearly any buyer. It is the business of lenders to do so.
The different types of mortgages, rates and lender fees all play a critical role in the sum of money a homebuyer will ultimately pay to finance their purchase. The difference between one lender’s offer and another’s can easily equate to tens of thousands of dollars over the life of a mortgage. Thus, buyer’s need to be advised to inform themselves by soliciting mortgage quotes from multiple lenders. Simply – they need to shop around.
Related article:
The Mortgage Shopping Worksheet — assist your homebuyer to close with the most competitive lender
