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You’ve found your perfect home in Chicago. It has everything on your wish list: location, amenities, and charm. But there’s one big factor standing between you and the keys to the front door: your loan-to-value ratio (LTV). Don’t let a poor LTV rob you of your dream home! With some strategic planning, you can improve your ratio and get approved for the mortgage you need. Let’s take a look at what LTV is and explore some practical tips for boosting yours.
What is Loan-to-Value Ratio?
In simple terms, your loan-to-value ratio compares the amount of money you wish to borrow against the appraised value of the home you want to buy. Mortgage lenders calculate LTV by dividing your requested loan amount by the home’s value. For example, if you want to borrow $300,000 and the home is appraised at $375,000, your LTV would be $300,000 divided by $375,000, which equals 0.8 or 80%. The lower your LTV, the less risk for the lender – and the more likely you’ll be approved for a competitive mortgage rate. Many lenders prefer to see an LTV of 80% or lower to consider a borrower a good credit risk.
Tips to Improve Your Loan-to-Value Ratio
If your LTV is higher than you’d like, there are several strategies you can employ to bring it down. First, you might consider choosing a less expensive home than you originally set out to buy. Opting for a lower-priced home will naturally lower the required loan amount and improve your loan-to-value ratio. While it may not be your dream home, purchasing a more modestly priced property can help you get your foot in the door.
If you’d rather not go with that option, you might consider making a larger down payment of 20% or more of the value of the home that you are eyeing, as this will dramatically improve your ratio. Of course, it will help you out significantly to save aggressively and build up your down payment funds prior to applying for a mortgage. Come up with a savings plan, cut unnecessary expenses, and find some creative ways to earn extra income that can be solely dedicated to your down payment savings goal.
Another option to explore is whether you qualify for specialty mortgage programs that offer more flexible loan-to-value ratio standards. For example, VA loans are mortgages that are backed by the Department of Veterans Affairs for eligible military service members and veterans. VA loans minimize or eliminate the down payment, giving veterans and active-duty personnel more room for a higher LTV. Researching these and other types of government-backed mortgage programs could really improve your chances if you need a higher LTV. Of course, an experienced local mortgage officer can help you evaluate if you qualify for any of these specialty lending programs.
Improving your loan-to-value ratio takes time and diligence; but with patience and commitment to your financial goals, you can get your ratio where it needs to be to buy your Chicago dream home! There’s no reason a disappointing LTV needs to stand between you and homeownership. You’ve got this!