LTV stands for loan-to-value. It is simply your loan amount divided by the lower of the purchase price or appraised value. That last part is in bold for a reason — it’s important. Let’s say you’re buying a house, and the sales price is $300,000. You’re putting down 20%, so your loan amount is $240,000. Initially, you think your loan has an 80% LTV ($240,000 divided by $300,000).
But LTV is determined by the lower of purchase price or appraised value. The appraisal comes in, and the appraised value is $270,000. What is your LTV now? It’s now 88.89% ($240,000 divided by $270,000) which means you need PMI (Private Mortgage Insurance).
What are your options?
Keep your loan amount at $240,000 and pay PMI
Contact the seller and see if you can renegotiate the purchase price down to $270,000
Agree to take 80% of the $270,000 appraised value ($216,000) so you won’t have to pay PMI (but remember — you still have to pay $300,000 for the house so now you’re putting down $84,000).
Low appraisals are not that common now since housing prices have stopped falling. On a refinance, the LTV is loan amount divided by appraised value (since there is no purchase price on a refinance).
If you have any questions on how LTV can affect your ability to qualify or your rate, call Amerifund at (888) 650-7316 or fill out this form.