Home Buying in Sacramento>Question Details

tpns28, Home Buyer in Roseville, CA

LTV determined on sales price or current market value?

Asked by tpns28, Roseville, CA Mon Dec 24, 2012

Hi I'm purchasing a new house and had some question regarding LTV. The sales price was $331,000 and within the past couple months and with the market and demand, the sales prices has increased by $28,000 to $359,000. I'm doing a 5% down payment and have inquired about my PMI payments and my LTV. My loan officer has informed me that my LTV is 95% since it is determined by my 5% down and my sales price. Is there a reason why this calculation is determined sales price and not on current market value instead?

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Jim Walker’s answer
Here is why it is the lower of::
Banks want strong collateral.

Imagine a world where that were not the case. IIf they lend 95% of the appraised value! Lets pretend you got an appraisal for $500K then 95% of that is $475K. If you could buy it for $359K and get the bank to give you $126,000 cash -- if they just went with the "higher of appraisal or sale price"

The banks would get a lot of business then they would go out of business.

Oh yeah. A lot of them did. And they did.

Remember Washington Mutual, INdyMac, Countrywide? Yeah, me too.
0 votes Thank Flag Link Sun Dec 30, 2012
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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In NY it's based on the appraised value, but in all other states it's calculated on the sales price. Why? Well I'd imagine that the "true market value" is whatever someone is willing to pay. An argument for using the appraised value (if higher) instead would also have some merit. But if the higher appraised value was used, then mortgage insurance companies wouldn't be able to charge you those higher premiums... and ultimately I believe that is the reason that the lower of the purchase price vs. appraised value is used.. more $ for the insurance companies. In NY a law was passed to require the appraised value to be used, but other states have not passed such a law. You can read information about that NY law at http://www.dfs.ny.gov/insurance/ogco2005/rg051016.htm ... hopefully one day California will pass a similar law.

Shane Milne | Lending in all 50 states | NMLS #81195
0 votes Thank Flag Link Wed Dec 26, 2012
The lender will utilize your purchase price as your base for calculating your loan to value.
You will be eligible for refinancing your home after 1 year.

Once you have actually paid your loan down to 80% of the original purchase price ( loan amount in a refi), you can request the mortgage insurance to me removed from the loan.

You may request removal of the mortgage insurance once the home has increased in value and the new loan to value is at 70%. This will require your supplying the lender with an appraisal.

All the above scenarios require that your payments be made on time and the mortgage be in good standing.
0 votes Thank Flag Link Wed Dec 26, 2012
Keep in mind that you can always put more down than 5 percent.
0 votes Thank Flag Link Tue Dec 25, 2012
I can't tell you why, but as the others have indicated, the sales price is used in all lending and appraisal matters.
0 votes Thank Flag Link Mon Dec 24, 2012
I don't have a problem with paying the 5% but i'm a bit confused why it's the lesser of the two. Since LTV is calculated based on the sales price, my LTV is at 95 (loan with a 5% down $314,450, sales price of $331,000) resulting in a higher PMI vs basing the loan amount with the appraised value (loan with a 5% down $314,450, appraised value of $359,000) with an a LTV of 87.5 resulting in a lesser PMI payment.
0 votes Thank Flag Link Mon Dec 24, 2012
Loan value is based on current market value as determined by the appraisal. See Marge's answer below. Though she is in a different state, she is correct for all locations. Good luck!
0 votes Thank Flag Link Mon Dec 24, 2012
LTV, or loan to value, is based on the SALES price that youa re purchasing the home for vs. the loan amount that you are acquiring.

You can purchase a home for more than market value. The lender will only loan on the loan to value ratio of the appraised value, or market value. The buyer would need to come in with the difference in cash and contribute more for the downpayment.

You can purchase a home for LESS than market value, the lender will only loan on the property at the lower purchase price.

in your cirvumstances, with the home price being higher than what you are paying for it, your calculation would not require you to bring any money in. The lender wants to see at least a small investment on your part in order to loan their own money on the purchase.

Home values go up, and sometimes they go down. When they go down, homeowners often think that the lender should take the loss, not them, which is erroneous thinking. (when the home goes UP in value, no one considers sharing their profit but they sure are quick to expect a lender to take the loss....see what I mean?)

That's the reason you need to to provide 5% down so you are providing a small investment into the purchase.
0 votes Thank Flag Link Mon Dec 24, 2012
The bank will lend you money based on the agreed sales price or the appraised value, whichever is the less of the two.
0 votes Thank Flag Link Mon Dec 24, 2012
It's sale price or appraised value, whichever is lower
0 votes Thank Flag Link Mon Dec 24, 2012
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