LTV Reflects Your Commitment to Your Home Purchase

When you apply for a mortgage, your lender will want to know what your down payment will be relative to the value of the home you are financing. This is called the loan-to-value ratio (LTV). If, for example, you are purchasing a home for $100,000 and borrowing $90,000, your LTV is $90,000/ $100,000, or 90%. You’re “committing” 10% of your own money.

The value of the property calculated in the LTV ratio will always be the lower of the appraised value or the contract price, as your lender will only lend against the lower of the two.

With FHA and VA mortgages, the LTV ratio can go higher than other lenders’ maximum requirements. The minimum down payment for FHA is 3.5%, so the maximum LTV ratio is 96.5%. If you can finance the up-front mortgage insurance premium required by the lender, the LTV can go higher than 96.5%.

Say the insurance premium is 1.75% of the amount financed. From our example above, 1.75% of $90,000 is $1,575. If you decide to finance the premium, your LTV becomes 98.25%. And this is OK with FHA. It works similarly with VA mortgages, even with 0% down payment loans.

Your LTV may be favorable, but you still have to consider closing costs and asset reserves. Typically these can’t be financed and will have to be paid from your own assets, seller credits, and/or lender credits. Do discuss these additional costs and your LTV with your mortgage professional, who can help you do what’s right for you.

Ensure You’re Happy with Your Locked in Rate

Just like the stock market, mortgage rates fluctuate. They may move daily, or even hourly, and often significantly in response to global events.

When you are negotiating a mortgage, you can “lock in” the mortgage interest rate through an arrangement with your lender. The arrangement will specify a time period over which you can lock in at the current interest rate.

Before you lock in your rate, you need to ensure the rate is one you are happy with not just for now, but for as long as you have the mortgage.

Because rates fluctuate, it can-and does-happen that after you’ve locked in, rates fall. A lock is a commitment on your part to accept a certain interest rate, and it’s unlikely that you will be able to get it lowered once you’ve made this commitment through the agreement with your lender.

To be able to lock your loan, you must be either fully approved or close to being fully approved.

This is to protect the lender, because by locking in your rate, he or she is making a commitment to the investor who will ultimately purchase your mortgage.

If the lender can’t deliver on your promised mortgage, he or she will be required to pay a fee for the use of the money between the date the rate was locked and the date the investor is notified that the loan won’t be delivered.

This can become expensive for the lender. Both you and your lender should respect the mortgage lock.

Lenders are unlikely to be able to predict rates in the future, and ethically they can’t-and shouldn’t-advise you on what will happen to rates.

Everyone has access to the same market information; your lender has no more insight into rates than you do. Expect your lender to explain the process, but not to help you decide when to lock in.