Understanding the Loan-to-Value Ratio in San Fernando Valley
When it comes to buying a home in the San Fernando Valley, there’s one term that seems to pop up again and again: loan-to-value ratio. This is an important term you’re going to need to know if you plan on purchasing a home.
So what does this number actually mean? Read our guide to understanding the loan-to-value ratio in San Fernando Valley.
Why Does this Matter
Most lenders will use that loan-to-ratio number to help them calculate the risk they may face when loaning money to a prospective buyer. If a buyer has a high loan-to-value ratio, then the lender sees that in the future, there is a great chance that the buyer might not be able to make the mortgage payments and could default on the loan. The number is used to protect the lender from making risking investments.
Equity also plays into the number. When a homeowner has less equity in their homes, they are considered to be a greater risk to lenders.
So how do you calculate this number? Say you are buying a home that is worth $300,000. You put a down payment of 10 percent, or $300,000, which means that you need $270,000 in a loan to pay the rest of the house payment. The loan-to-value ratio then is $270,000 divided by $300,000, which comes out to .9 or 90 percent.
Most lenders feel comfortable with a loan-to-value ratio of 80 percent or lower, which usually means that you should be putting a 20 percent down payment on your house. With a higher loan-to-value ratio, you may be rejected for a mortgage. If the lender does decide to give you the loan, he or she might add a higher interest rate. You may also have to buy private mortgage insurance, which will be paid to the lender in the event that you default on the loan. This insurance is typical for anyone with less than 20 percent on the down payment.
Lowering the Ratio
If you’ve calculated your ratio and it’s too high, there are two things you can do to lower that number and improve your chances of getting a good loan.
The first thing to do is to put more money on the down payment, preferably more than 20 percent. This ensures you get the loan and avoid those added fees and mortgage insurance payments. Of course, this is easier said than done. If you don’t have 20 percent of the home’s value, consider waiting to buy so you can save up a bit longer.
You may also decide to downsize to something you can better afford. A lot of people go for bigger houses they can’t really afford and don’t need rather than going for something more practical. You may have to compromise on a few of your wants, but you can always look to other options, such as foreclosures for good deals.
If you know you’re going to want to buy a San Fernando Valley home in the near future, speak with a lender to start working on a down payment plan that will work for you. In the meantime, keep saving so that down payment will be ready when you need it.