Mortgage loan to value ratios are determined by using the appraised value and the lender's maximum loan amount based on value. In some cases, this may be as little as 70% and in other cases, may be as high as 97%. Here are some common calculations that will help clarify the variance in loan amounts based on similar property values. We will use a value of $250,000 and show the various calculations based on loan types. It is important to understand that these calculations are general and will not apply to all lenders.
Loan Type: Standard purchase owner occupied property - maximum loan to value 95%
Most lenders are willing to loan up to 95% for those who are purchasing a home they intend to occupy. This means that in addition to a down payment, a borrower must also have funding to pay for closing costs. A typical purchase calculation may look like this:
- Purchase Price: $250,000
- Loan to Value: 95%
- Maximum Loan Amount: $237,500
The net result is that the borrower will need a minimum of $12,500 for a down payment plus the associated closing costs.
Loan Type: Purchase of investment property - maximum loan to value 75%
Lenders generally prefer to loan less money when a property will not be occupied by the owner. Investment properties (e.g., residential properties of four units or less) generally mean higher risk for the lender.
- Purchase price: $250,000
- Loan to Value: 75%
- Maximum Loan Amount: $187,500
The net result is that the borrower will need a minimum of $62,500 for a down payment plus the associated closing costs which are substantially more than if the same property would be owner occupied.
Loan Type: Second mortgage loan - Owner occupied
Second mortgages (or home equity loans) have different requirements than purchase loans. The amounts that lenders are willing to loan may also be significantly lower. Home equity loans may take on various forms including equity lines of credit or straight second mortgage loans.
- Home Value: $250,000
- Max Loan to Value 80%
- Current first mortgage: $125,000
- Maximum second mortgage: $75,000
Many lenders will require that the borrower have significant equity in their home, especially when the real estate markets are not performing well. Lenders may also require that borrowers pay off certain credit cards or car loans as part of approving a second loan.
Loan Type: Second mortgage loan - Investment property
There are numerous lenders who will not approve a second mortgage on an investment property unless the funds are being used for a specific purpose. One of the primary reasons for this is that many lenders feel that the owner does not have a vested interest in the property. Generally, the loan to value allowed for a non-owner occupied property is significantly lower than other second mortgages.
- Home Value $250,000
- Max loan to value 60%
- Current first mortgage $125,000
- Maximum second mortgage: $25,000
One of the reasons that these calculations are so critical to lenders is that if the real estate market gets “soft" they may be faced with negative equity loans. A negative equity loan is not an ideal case for either the lender or the borrower. The lower loan to value ratios help protect both the lender and the borrower.