If the income earning ability of the borrower and the location of the property is satisfactory, lenders may be willing to grant a loan request in excess of 80 percent of value with a condition that the borrower purchase --------against default risk.
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Example of LTV
For example, suppose you buy a home that appraises for $100,000. However, the owner is willing to sell it for $90,000. If you make a $10,000 down payment, your loan is for $80,000, which results in an LTV ratio of 80% (i.e., 80,000/100,000). If you were to increase the amount of your down payment to $15,000, your mortgage loan is now $75,000. This would make your LTV ratio 75% (i.e., 75,000/100,000).
Variations on Loan-to-Value Ratio Rules
Different loan types may have different rules when it comes to LTV ratio requirements.
FHA Loans
FHA loans are mortgages designed for low-to-moderate-income borrowers. They are issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA). FHA loans require a lower minimum down payment and credit scores than many conventional loans. FHA loans allow an initial LTV ratio of up to 96.5%, but they require a mortgage insurance premium (MIP) that lasts for as long as you have that loan (no matter how low the LTV ratio eventually goes).4 Many people decide to refinance their FHA loans once their LTV ratio reaches 80% in order to eliminate the MIP requirement.
VA and USDA Loans
VA and USDA loans—available to current and former military or those in rural areas—do not require private mortgage insurance even though the LTV ratio can be as high as 100%.5 6 However, both VA and USDA loans do have additional fees.
Fannie Mae and Freddie Mac
Fannie Mae's HomeReady and Freddie Mac's Home Possible mortgage programs for low-income borrowers allow an LTV ratio of 97%. However, they require mortgage insurance until the ratio falls to 80%.