Down Payment Options and LTV Ratio Information

For most first-time home buyers, saving enough money for a down payment is the biggest hurdle to overcome. Traditionally, lenders require a down payment of at least 20% of the home’s purchase price.

To save for your down payment, you will want to tap these resources:

  • Family Gifts
  • Personal Savings (including IRA’s and 401K’s)
  • Proceeds from the sale of an asset (including stocks, bonds and real estate)

Once you have your down payment, lenders will come up with a lending risk ratio, also called an LTV ratio, which is calculated by dividing the total amount for the mortgage or loan by the appraised value of the property. Bankers usually require a ratio of at least 75% for a mortgage to be approved.

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What is an LTV ratio

The LTV ratio is the loan amount expressed as a percent of either the purchase price or the appraised value of the property.

A mortgage with a high LTV ratio is one where the mortgage amount is high relative to the borrower’s cash down payment or to the equity of the property. From a lender’s perspective, a high LTV ratio mortgage is more risky.

When borrowers make a large cash down payment, or have a large equity on a property, they are less likely to default on the mortgage.

Lenders often require borrowers of high LTV ratio loans to pay mortgage insurance to protect the lender from a buyer default. This increases the cost of the mortgage. High LTV ratio loans can also carry a higher interest rate and they are often more difficult to qualify for.

Some lenders require borrowers to have a larger monthly income to qualify for a 95% LTV ratio mortgage than is required of borrowers with a 20 percent cash down payment, even though the loan amount is the same.

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If the buyer’s LTV ratio 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.

High LTV ratio buyers are at a disadvantage when they are competing with other buyers. If given the choice, most sellers would prefer to accept an offer from a buyer with a large cash down payment.

Do you have more questions about the mortgage refinancing loan application process? Click on a question below to get the answers you need to make informed, educated financial decisions.

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This site is not a broker and does not collect or solicit mortgage applications. Content is for informational or comparison purposes only. Services are not available in New York. Products and services may not be available in all other states.

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