You want to refinance your mortgage to make it more affordable. Or maybe you want to take cash out of the equity. Either way, you have one obstacle in your way – the LTV. This important calculation is how the lender determines your ability to refinance. In fact, the LTV helps to determine many factors regarding your loan, aside from your eligibility. It demonstrates your level of risk to the lender, which helps them determine the right costs and interest rate to charge. The good news is that today, even the highest LTV ratio doesn’t prevent you from refinancing. There are many options available.
The Conventional Loan
The most common loan is the conventional loan. You secure this loan from the big-name banks. It is also the loan people with good credit and low debt ratios often secure. If you have any special circumstances surrounding your loan application, chances are, conventional financing will not be an option for you. That being said, the highest LTV ratio for a conventional loan equals 95 percent. This number might shock you. Don’t you need 20% equity in a home to refinance a conventional loan? For all intents and purposes, 20% equity is the magic number. It is not necessary, though. There is a way around it – PMI.
Private Mortgage Insurance is an insurance policy the lender carries, but you pay for, that protects their investment in your property. If you refinance with an LTV of 90%, your chance for default increases. The PMI, however, covers the lender’s assets. If you did default on the loan, the lender still gets paid by cashing in on the insurance policy. The premiums are an added expense for you on top of your principal, interest, taxes, and homeowner’s insurance, though. Because conventional financing often carries the lowest interest rates, PMI does not cause a significant burden.
The FHA Loan
If you currently have an FHA loan, you may have better luck refinancing. This is true even if the value of your home dropped enough that you are underwater (owe more than the home is worth). The FHA offers a program called the Streamline Refinance. With this program, you don’t need an appraisal. This means you could have 5% equity, 0% or be completely upside down on your home. The government agency will help you refinance and secure a lower payment. However, you must meet certain specifications:
- You must have a current FHA loan
- You cannot be late on your FHA loan
- You can only secure a rate/term refinance
- The interest rate must be lower on the new loan
- There must be a benefit for refinancing
If you need to take cash out of the equity of your home and you have an FHA loan, you can still secure a cash-out FHA refinance. However, you will need an appraisal. If you are upside down on your home, you are out of luck. Generally, the highest LTV ratio allowed for an FHA cash-out refinance equals 85%.
Here’s an example:
Your current FHA loan balance equals $150,000
The value of your home currently equals $225,000
Your current LTV equals 67%
You can take out up to $41,250 on a cash out refinance.
The VA Loan
Another government-backed program also offers you some leeway to refinance. The VA loan, which is a loan program for our veterans, has a Streamline Refinance Program called the Interest Rate Reduction Refinance Loan. As the name suggests, the program helps you reduce your interest rate. Just like the FHA loan, this program does not require an appraisal. You can refinance as long as you are current on your loan and can prove there is a benefit to the refinance. As was the case with the FHA streamline program, you cannot take cash out of the equity of the home.
If you do need to take cash out of your equity, you can refinance with a VA Cash Out Loan. This program requires full verification of every aspect of a typical loan application including credit, income, debts, and the value of the home. In most cases, the highest LTV ratio for a VA cash out refinance equals 100%.
Home Equity Loans
Another option you may have available to you is the home equity loan. Technically, this is not a refinance of your current loan. Instead, you take out an additional loan against the equity in your home. The amount you can borrow varies by lender. Some allow a combined loan-to-value ratio of around 85%, while others go as high as 95%. If you know you want a second mortgage to take cash out of your home either to fix your home up; pay off debts; or pay for another large expense, shop around with different lenders. You will likely find different requirements for each lender. Some you may appeal to and others may turn you down – this does not mean you will never find a home equity loan.
Finding the Highest LTV Ratio Allowed
If you have a high LTV, you have your work cut out for you. It doesn’t mean you won’t be able to refinance – there are thousands of lenders out there. If you know you don’t qualify for an FHA or VA Streamline Refinance because you either don’t have those loan programs or you have a late payment in the last 12 months, you have other options. Be prepared to need an appraisal on your property for any other program, though. If you know the appraisal will be close and you need a program with the highest LTV ratio allowed, shop around! Portfolio lenders and subprime lenders make up their own rules, so they may even have a program for you.
The bottom line is you probably can refinance, you just have to get creative. Think of ways to lower your LTV if it comes down to it. Maybe you need to take the time to pay some of your principal down while in the meantime, hopefully the value increases. If that is not an option, consider taking less cash out of the equity of your home. Think of the largest benefit you would reap by refinancing and go with it. Would saving money on your monthly payment be enough or do you need the cash in your hand from the equity in your home? Your exact circumstances will help you determine the right situation for you for refinancing your home.