For every form of loan that the loan value is relatively higher than the property value that stands in for the collateral is referred to as a High-Ratio Loan. This loan is often time offered to borrowers who are not able to cope with a large down payment. Mortgage loans with high loan ratios always backed with a loan value that is higher up to 100% of the value of the property.
The down payment is always less than 20% of the purchased price. Thus, if the down payment is increased (the loan), the ratio of the loan will decrease. The loan-to-value ratio is typically an assessment of lending risk used by financial institutions before they approve a mortgage. It is a tactic for calculating the high ratio loan.
- Firstly, do you know that a high-ratio loan has its loan value higher than the property value used as collateral?
- Do you know that the mortgage loans that have high loan. Ratios will have a loan value hitting 100% equivalent to the property?
- Also, do you know that the down. Payment of a high ratio loan is less than 20% which means the value. Exceeds 80% of the property value? And this can be done with the calculation of the loan-to-value ratio.
The Formula for a High-Ratio Loan using LTV
Moreover, there is no specific formula to actually. Calculate a high ratio loan but this does not mean that as an investor you. Shouldn’t have a common knowledge of how to determine if the loan. Exceeds the 80% Loan-to-value ratio.
Loan to Value Ratio= Mortgage amount
Appraised property value
How to Calculate a High-Ratio Loan via LTV (Loan-to-value) ratio
The below steps can help you calculate a high-ratio loan.
- The LTV ratio is calculated by dividing the. Borrowed amount over the appraised value of the property.
- Multiply the result by 100, thereby. Simplifying it to percentage form.
- However, from the result, if the value. Of the loan exceeds 80% of the LTV, then the loan is considered as a high ratio loan.
It is important to know how why the LTV is needed. The need for calculating the High-Ratio with LTV is as a result of the lenders being away of the risk there are about to face or that is associated with a mortgage loan. If after the calculations have been made and the borrower didn’t make a sizable downpayment the loan value is said to have appraised value of the property and thus, it is a high ratio loan. If the property value of the loan approaches 100% of the property value, this is a risky type. Many lenders may consider this to be too risky and can deny the applicant of the loan.
In such a scenario, the lender is at risk of the borrower by default as long as the LTV is too high. However, the bank might be able to sell the property in equivalence to the loan such that it can cover up for the borrower because of the value involved. This often happens when the housing property decrease in value as a result of the economic downturn. and as a result, the lender cannot place the housing property value to measure up, leading to underwater because the borrowers exceed the value of the property. Now, this places the lender to lose because the value cannot be equated to the value of the loan. This is the importance of LTV.
I want to get High-Ratio loans
Genuinely, the Federal Housing Administration offers programs whereby the borrowers can get an FHA loan with an LTV ratio of up to 96.5%. Furthermore, the loan requires a downpayment of about 3.5% with a minimum credit score to get approved for a high ratio loan. More so, there is room for a low credit score with a downpayment ratio of 10%.
Limitations of Using a High-Ratio Loan
Having a low credit score is a major limitation of getting a High-Ratio loan because the strength of your credit score is what determines your ability to pay back the loan. Now with that low credit score, you should know that high-ratio loans come with high interest which you may not be able to handle concerning the credit score and strength. However, this will limit you to getting a High-ratio loan because of what your credit score looks like and the strength of what the payback will look like.