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Real Estate Tips: Articles on the Flagstaff Real Estate Market: Past Articles [February 2009]

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Loan-To-Value and what it means to the home buyer.

By now everyone knows that the housing market is a mess and that foreclosures seem to be the norm.  Those who don’t know probably live in a cave on the slope of Mt. Elden and don’t care.  Each week we in the real estate industry here in Northern Arizona receive a list of trustee sales that are forthcoming and our multiple listing service contains numerous short sale listings.  As a result of the high number of mortgage defaults, lenders are scrutinizing loan applications very closely and are turning down loans for individuals whose qualifications are minimal.

If you are in the market to purchase a home, a factor that your lender must consider before they approve you for a 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 in the event of foreclosure which puts lenders more at risk.

With the drop in home prices 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 the loan process to you as a prospective home buyer.   Contrary to what you may hear or read in the news, mortgage companies are willing to lend money and rates are near 5% as I write this article.  If you have excellent credit you can borrow money with as little as 3 1/2% down using a Federal Housing Authority loan. There is some speculation that rates may drop more in the months ahead, however with market conditions such as they are, I don’t recommend waiting.

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