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Real Estate Tips: Articles on the Flagstaff Real Estate Market [September 2007]

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Loan-To-Value and what it means to you as a home buyer.

We all have heard of the high foreclosure rate sweeping the country because of loans that were provided to people with marginal qualifications. Today lenders are scrutinizing loan applications more closely and are turning down loans for individuals whose qualifications are less than desirable. One of the factors your lender must consider before they approve you for a home mortgage is the loan-to-value ratio (LTV). The LTV is the loan amount expressed as a percent of either the purchase price or the appraised value of the property. If you make a 20 percent cash down payment on a property you're buying, the LTV is 80 percent.

A mortgage with a high LTV is one where the mortgage amount is high relative to the borrower's cash down payment or to the equity in the property. For example, if the LTV is 95 percent, the mortgage amount is equal to 95 percent of the purchase price and the buyer's cash down payment is equal to only 5 percent of the price. From a lender's perspective, a high LTV mortgage is more risky than one where the LTV is low. When borrowers make a large cash down payment, or have a large equity in a property, they are less likely to default on the mortgage. Borrowers with less equity in a property have less to lose which puts lenders more at risk.

Home sellers also have reason to be concerned about the buyer's LTV. If the buyer's LTV is high and the appraised value of the home comes in lower than the purchase price, the transaction is put in jeopardy. Part of the mortgage approval process involves an appraiser's report of the current market value of the property. If the appraised value comes in lower than the purchase price, the lender will base the LTV on the lower of the two amounts.

There are numerous lenders in Flagstaff and any one of them can explain LTV to you as a prospective home buyer. Mortgage companies are still willing to lend money and although interest rates have gone up this summer, they are still attractive. There is some speculation that rates may drop in the months ahead.

Mary Monday is an Associate Broker at RE/MAX Peak Properties. She can be contacted at (928) 779-9090 or Mary@MaryMonday.com.

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“Mary Monday made the experience of selling my home a genuine pleasure. It delights me to know there are true professionals left in the world.”—BS