The method that mortgage and bank lenders use in order to issue loans on specific homes with a number value is pretty much of common knowledge, though it s unlikely that you’ll hear anything from them during the appraisal and for the loan commitment. It can be a wait that you’re unlikely to ever forget.
All mortgage lenders have a set criterion that they use to determine whether or not you are eligible for one. This has to do primarily with the ratio of your debts to your current income. But there is a different part of the criteria that uses something different; this other part concerns the appraised value of the home. This has little to do with you.
and if we expand from there..
If you’re concerned in the mathematical equation that is utilized for the loan-to-value ratio, all you’ve got to do is divide the mortgage amount by the appraised value of the home and then jot down the end result as a percentage, as it is how loan-to-value ratios are expressed, as a percentage. Usually the value of the home will be greater than the value of the loan, meaning you should end up with a percentage that is below 100%. A lender is more likely to provide a loan approval with a low percentage rate because it typically has less risk.
Its not out of the matter for a loan-to-value ratio to be greater than 100 %, but would be extremely risky. That means that the value of borrowing exceeds the value of the home, making it very hard for you to sell on without having to pay back the entire mortgage. While a lender is fundamentally in the activity of issuing loans, with a view to make money, they’re most concerned with their interest in the entire transaction and avoiding all and any risks. The past mortgage crises were the result of lenders issuing loans with very high loan-to-value ratios on them.
Loan To Value Ratio, are you kidding?
The rate of interest that any borrower is supposed to have to pay for the duration of the loan is affected greatly by its ratio. The lenders assessment of risk and possibility of foreclosure is used to identify this rate. A borrower may also be taken to purchase a mortgage insurance which will only benefit the lender, particularly if the borrower decides to stop financing it.
Interest rates are determined on what is known as the term structure of interest rates. Essentially, this mean that, because the maturity (tip of the debt’s life) increases, so must the interest rate to offset the lender for the risk associated with the loan not being paid back. The longer the maturity, the more likely something will happen and the borrower will default on the loan. However, the amount of cash borrowed also determines the loan’s riskiness. This makes sense because the more a person borrowers, the less likely he/she will be in a position to pay it back. Ask yourself, which is riskier, lending $10 to person for a day or lending $100, 000 to someone for thirty years? Both the length of time and the sum borrowed determine the riskiness of debt.
Its very important you are aware that any ratio that exceeds 80% means that loan isn’t saleable on the secondary loan market and thus should be maintained as a portfolio loan. Selling loans to bigger financial institutions is a way that many lenders use in order to produce a profit within a relatively short time of time.