It is very common to apply for financial assistance when you have to purchase a residential property. There is nothing better than buying a dream house. However, loan applicants should take few core factors into account and then take the decision. Calculating the LTV (Loan to Value) ratio is an important factor. It gives you a clear insight about property value you should select and ideal down payment.
Loan Granting companies have their policies
A company that offers financial loans takes numerous factors into account. These institutions do not grant loans randomly. The financial condition of the applicant is examined through various methods. For instance, per month earning is checked so that it can be determined whether the applicant would be able to pay the monthly payment or not. It is obvious that if someone is earning a sum of 8,000, he would not be able to pay a monthly payment of 6,000. This is where the LTV ratio comes into play.
Formula of LTV is given as
LTV = Mortgage Payment / Appraised Property Value
The input parameters of this formula are easy to understand. The value of LTV is the ratio of Mortgage Payment and Appraised Property Value. The appraised property value is the total price of the property. The mortgage amount is what the applicant is taking as loan. It is the difference between appraised value and mortgage payment.
An example would provide us with more understanding. Consider that you want to purchase an apartment which has a price of £50,000. If the applicant pays an advance payment of £10,000, he would take the remaining 40,000 as mortgage. Hence, LTV would be given as
40,000/50,000 *100
LTV = 80%.
This is the maximum LTV you would be applying for. If your LTV is above 80%, the probability of getting the application accepted is less.
Influential factors for LTV approval
At times, people apply for loans and expect the application to be accepted without any problem. If unfortunately, the application gets rejected, people fail to figure out the reason. This does happen when people do not have enough idea about how the loan application process works. Thus, before you apply for the loan, make sure that you have complete information of how the process works so that you do not make mistakes. Communicating with a loan officer is a helpful option. This conversation would help you in clearing confusions.
Here are some key factors which you need to be aware of
1. Choose the property value with a careful approach
There is no doubt that everyone wants to buy the best residential property but you need to keep a check on the affordability factor. Do not apply for a very large mortgage amount. This is the key reason why loan applicants with a down payment of less than 20% are rejected. Loan giving companies have a complete process for risk assessment. They analyze the application after taking several factors into account. One of them is the financial status of the applicant. If he is unable to pay off 20% of the total amount, it becomes a doubtful situation about whether he would be able to make the complete mortgage payment.
As a loan applicant, make sure that you are not applying with an over ambitious approach. Check your financial condition and then choose the property. You should be confident that the down payment and per month installment would be paid without any kind of trouble.
2. Make the maximum possible down payment
Loan giving companies do have a condition that a minimum of 20% down payment has to be paid by the applicant. However, opting for a higher advance payment percentage would help you out. This is because you would not have to pay a large sum as monthly installment. This is one factor that a lot of loan applicants do not consider. Mortgage payments have to be paid for several years. Thus, if this payment is reduced, it benefits the applicant.
Most loan applicants do not keep the long term picture in mind. They simply check whether the down payment is affordable or not. However, if you do not analyze the monthly installment in a careful manner. The problem starts when they are unable to afford the payment.
It is always better to choose a property with a lower price than feel sorry for your selection. Closely analyze your monetary condition before you finalize a selection. Some people who apply for loans have an overambitious attitude. They simply check whether the down payment can be paid easily or not. Can you pay the monthly mortgage payment easily? This is the key question you need to ask yourself. Once you are sure that there would be no issues in paying the monthly installment, you would apply for the loan.
Conclusion
Most people looking to buy a property opt for financial assistance. In the present time, it has become quite hard to buy property on cash. Most people who apply for loans do not have complete awareness of the conditions applied. Thus, when their applications get rejected, they fail to figure out the reason. Hence, to start with, get a proper idea of how you should apply for a loan successfully. If your application is rejected, it would be a major problem for you
The LTV is a factor which explains the financial situation of an applicant. People who can pay a larger sum as advance carry a stronger financial situation. Similarly, people who can only pay 20% of the amount as advance do not get rejected as it is the minimum benchmark. However, such people are not considered financially strong.
Using calculators.tech online Loan to value calculator is the most convenient way to calculate LTV. You simply have to enter values and the mortgage percentage would be determined. There is nothing bad about applying for a loan but you should try and pay the maximum percentage as down payment.
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