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Your Downpayment and LTV

More than how much mortgage you can afford, some lenders will actually first look at how much of a downpayment you can make.   The majority of lenders require anywhere from a 5% to 20% downpayment on the price of a house you want to buy.

Your Down Payment Can Be a Valuable ‘Leverage’

Your down payment amount can greatly impact your mortgage and, provided you can raise enough cash, it does not have to be a hindrance. It can even prove to be a valuable tool.

For instance, if you offer a lender a bigger downpayment than is required, you gain leverage to negotiate for a speedy approval of your mortgage without having your income verified. Also, a bigger down payment may mean that a less than optimum credit standing will be ignored.

Moreover, if you put more cash down, you will not only lower your monthly mortgage dues you will also be able to buy more expensive property.

LTW – How It Is Calculated

The downpayment will not necessarily be equivalent to the cash you provide, since settlement expenses may eat into it. But in general, your down payment should be the value of the property minus the amount the lender will provide.

Lenders calculate the downpayment via the LTV (loan to value) ratio, calculated as follows in the example below.

Property value = $250,000

Loan amount = $180,000

LTV = ($250,000 – $180,000) / $250,000 = 28%

An LTV of 28% is acceptable, since most lenders only require 20%. If you do not hit 20% you can make your LTV acceptable by putting down more cash or opting for less expensive property.

If you do not want to settle for cheaper property, you can increase the cash you put down by considering other sources, such as borrowing from your 401(k) and paying it through a salary deduction or postponing a yearly vacation.

The LTV is useful in avoiding confusion in cases of financial settlement where the amount that constitutes the cash you put down can mean a different amount to you and the lender.

Therefore, many loan approval guidelines consider LTV rather than down payment and require insurance for LTVs above 80%, which is similar to requiring mortgage insurance for downpayments less than 20%.