Believe it or not, house hunting and obtaining a mortgage can be a simple, low-stress process. While there are plenty of very specific terms and concepts related to securing your home loan, these ideas are quick to learn, and once you understand them, you’ll find it easier to complete negotiations with a seller and take ownership of a new house.
Loan-to-value (LTV) ratio is one of the most fundamental numbers associated with your home loan, and its definition is in its name. The LTV on a mortgage is equal to the current balance of a loan divided by the full value of the home. There are a few more ideas to remember when setting the initial LTV of your mortgage.
How to set your LTV ratio
The starting LTV ratio of a new mortgage is determined by the size of your down payment, and will influence the way you pay off that loan. The down payment is the amount of money you pay off immediately when you sign a new mortgage.
It’s important to note that closing costs of the loan don’t count toward the down payment amount. You should be sure you’re ready to pay fees and taxes associated with buying a home in your state. Your First Centennial Mortgage loan officer will help you through this process.
How LTV can affect mortgage features
Once you’ve determined your down payment amount, the repayment terms of your loan will become clearer. Sometimes, when you’ve paid less than a 20% down payment and your LTV ratio is between 81% and 100%, you’ll be required to take out mortgage insurance. Paying off the insurance represents an extra monthly cost, and therefore you should determine whether it’s more financially advantageous to make a lower down payment and pay for mortgage insurance or spend more up front.
There are exceptions to this choice between mortgage insurance and big down payments: Specialized, government-backed loan programs through the Department of Veterans Affairs, the Federal Housing Authority and the U.S. Department of Agriculture can combine low initial payments with a lack of mortgage insurance. It’s worth discussing these options with your loan officer if you fit certain criteria – for instance, if you’ve served in the military or are buying a home in a rural community.
How to start the mortgage application process
Now that you know more about the loan application process, you can reach out to your First Centennial Mortgage loan officer to seek pre-approval. Being pre-approved for a home loan is a great way to determine how much house you can afford in terms of square footage, features and location. Furthermore, with pre-approval in hand, you can prove to sellers that you’ll be able to finance your home purchase.
Do you have more questions? Contact the loan officer who shared this blog post or send us a message.