If you’re seeking a jumbo home loan (be it an interest only super jumbo mortgage loan, a 15-year fixed jumbo loan, or a fixed term jumbo ARM), the loan to value ratio on your investment counts. Banks and lenders take a keen look at the loan to value (or LTV) of a home loan to determine whether a specific loan product is a viable product to offer to a borrower. Lenders have to ask themselves, “Will this loan earn me returns on my investment over the lifetime of the loan? And is the borrower liable to default on this loan?” An LTV ratio helps to answer those questions. Let’s take a look at the meaning of the loan to value ratio, as well as its importance in determining which home loans are viable for lenders. Also, let’s delve into the importance of the LTV ratio here in the jumbo and super jumbo loan market.
What Is a Loan to Value Ratio?
A loan to value ratio is a comparison of the amount of a home loan versus the value of the property against which a mortgage is borrowed. Basically, it’s the value of the home loan, divided by the value of the home. For instance, if you’re investing in a property that has a market value of $500,000, and you need to get a loan for $250,000, the LTV ratio of your mortgage is 50 percent; your home loan is half of the value of the property. That’s $250,000 (the loan amount), divided by $500,000 (the property value), multiplied by 100 (to account for percentage).
How Does the LTV Determine the Viability of a Loan?
Lenders prefer to loan money to buyers who are seeking a mortgage with a low LTV ratio. The logic is thus: Borrowers who are borrowing less, and covering a larger portion of the cost of their investment upfront, are more likely to pay off their loan over its lifetime. A borrower who has already invested a major portion of the value of their home (via a down payment) is less likely to default on a loan.
Take the following example: Some borrowers may be forced to default on a home loan if they experience a job transition. If they can’t keep up with home loan payments, they may default on their mortgage, and they may lose their home. Lenders don’t want this to happen. Mortgage lenders want to provide a loan product that makes sense for both parties: the borrower as well as the lender. Borrowers should be able to pay back a loan and earn a home. Lenders provide that opportunity, and they seek to protect themselves from bad investments (or loan defaults).
The LTV ratio of a mortgage is a major determining factor in the validity of a loan. Some lenders will have a restriction on the LTV percentage range within which they will lend. For instance, one lender may only lend to borrowers seeking loans with LTV ratios that are 80 percent or less; meanwhile, another lender may cater to borrowers seeking loans with LTV ratios that are 90 percent or less.
LTV & Jumbo/Super Jumbo Mortgage Loans
As with all home loans, the LTV ratio can affect whether or not a lender provides a viable mortgage product to a borrower, and it can affect how a loan product is underwritten–that is if the lender provides a mortgage product to a borrower. In the jumbo and super jumbo loan markets, lenders are more likely to cap the allowable LTV ratio for their mortgage products at a lower percentage than other, more traditional loans. Since jumbo and super jumbo mortgages are far larger loans that traditional loans (Jumbo loans are loans amounting $417,000 or more, and super jumbo loans are loans amounting $500,000 or more [depending on classification criteria].), lenders seek safer investments. Essentially, the risk is higher for the lender (because the value of the loan is higher), so lenders mitigate that risk by providing mortgages only to borrowers seeking low LTV ratio home loans. Most lenders have a maximum limit on a loan’s LTV ratio around 80 percent; however, some lenders won’t provide jumbo or super jumbo mortgage loans which have an LTV that’s less than 50 percent.
Our Jumbo & Super Jumbo Mortgage Loans
Here at MortgageBase, we specialize in providing jumbo and super jumbo loan packages for folks across the nation. We provide competitive mortgage rates, and we work with borrowers to provide the perfect mortgage product to suit their specific needs. We can build interest only jumbo and super jumbo loans, fixed rate jumbo and super jumbo loans, and adjustable rate jumbo and super jumbo loans. Get in touch with us today to learn more about our home loan products, or to inquire about our LTV requirements.