Mortgage Calculators, the Appraisal and Loan to Value

Loan to value is a measure of the loan amount requested divided into the property value.  The loan to value for home loan that is being refinanced is the new proposed loan amount divided into the value of the property that is determined by the appraisal.  For a purchase transaction the loan to value is the loan amount divided into either the appraised value or the purchase price, whichever is lower.  When using the mortgage calculator the property value can be estimated until an appraisal is performed.

When calculating the down payment on a home loan purchase, assume the property is worth 100% and subtract the down payment amount reflected as a percentage of the property value and it will yield the loan to value.  Conversely, 100% minus the loan to value will equal the down payment percent.  A 5% down payment is therefore the equivalent of a home loan at 95% loan to value.  A 90% loan to value home loan would require a 10% down payment.  The mortgage calculators will work with either figure.  On some of the mortgage calculators the loan to value is calculated based on the home price and the loan amount and on other mortgage calculators the down payment is requested and loan to value is calculated from that point.

The appraisal on the property, whether it is done for a purchase or refinance, is usually one of the final steps in a loan approval.  Most of the other paperwork such as credit, asset verification and income verification is performed rather quickly.  The appraisal may take between 5 to days to have ordered and completed.  Unfortunately, after performing the proper loan to value or down payment calculations in the mortgage calculator, an acceptable appraisal can cause the whole process to fall apart.

A property that under appraises can present a problem but may still lead to a viable home loan.  By simply entering the new value in the mortgage calculator the user can determine if the loan amount is a sufficient amount.  Unfortunately, more often than not, under appraising properties will lead to the loan being declined.

When refinancing, the mortgage calculator may have more value to help salvage a home loan that has appraisal issues.   A mortgage calculator is easily applied to ascertain whether reducing the loan amount will still provide enough funds to accomplish the goal of refinancing.  When the appraisal on a refinance is less than what is expected input the value determined by the appraisal and recalculate the loan to value to see if this amount is beneath the amount required by the lender.  If not reduce the loan amount in the mortgage calculator to see what the maximum loan is based on the appraised value.

For purchases, if the property appraises for less than the purchase price, the lender will determine the loan to value and the loan amount based on the appraisal.  If the loan approval requires a 5% down payment and the property is being purchased for a $100,000.00, the down payment would be $5,000.00 and the loan amount would be $95,000.00.  Once the appraisal comes in lower than the purchase price, perhaps in this example the house appraises for $96,000.00 new mortgage calculations based on this number have to be performed.   With a quick entry or two in the mortgage calculator a user can now calculate that the new loan amount will be 95% of $96,000.00 or $91,200.00.  Assuming the buyer does not reduce the purchase price to match the appraisal, the borrower will have to increase the down payment from $5,000.00 to $8,800.00.  The mortgage calculator will quickly deduce the figure based on changes in the property value.

Appraisals that do not match the assumed property value are not common but are by no means rare.  This occurrence is more common in turbulent or volatile housing markets as well as housing markets with limited activity.  If the loan request is for a refinance the potential for a loan denial can be mitigated by employing the mortgage calculator to determine maximum and minimum loan amounts based on different home values.  One of the true benefits of the mortgage calculators is to experiment with different data to evaluate the varying outcomes quickly.

In some cases the appraisal is even more damaging to the mortgage calculation outcome.  If the appraisal does not conform to standard housing guidelines the loan most likely will not be approved, regardless of the loan to value.  A property may be deemed non-conforming for a variety of reasons.  The most common appraisal problems on a property include; properties with deferred maintenance or the need for excessive repairs, properties that are unusual so as to not have comparable sales on which to judge the value, or properties that are in areas of significantly deteriorating neighborhoods.  These conditions are difficult to overcome and unfortunately can not be determined with the use of any mortgage calculator.

Mortgage calculators are valuable tools for assessing numerical input and output.  The mortgage calculator can help factor in changes in loan amount caused by an appraisal that may not bring in the value expected.  Mortgage calculators have there limitations on factors in loan underwriting that require more subjective decisions such as property conditions.

This entry was posted on Friday, December 12th, 2008 at 7:51 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.