If you’re ready to become a homeowner, you may be enticed by the historically low interest rates. Although it may be an excellent time to buy a home, the market is experiencing unprecedented competition in nearly every area of the country. Bidding wars are becoming increasingly common due to limited inventory, so it’s quite possible you could find yourself submitting one of multiple offers. However, before you make an offer, you should be aware of how bidding wars can affect your loan-to-value ratio. Here, I share more about this occurrence to help you determine if making an offer above asking price is the right choice for you:
What is the loan-to-value ratio?
The loan-to-value ratio (LTV) is a risk assessment that your lender uses to determine the risk of your loan. The LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property. When calculating this ratio, your lender uses the lower of the two. For example, if the appraised value is lower than the purchase price of the home, the lender will use the appraised value.
This calculation is used to determine your interest rate and the amount that you’ll need for a down payment. Ideally, the LTV ratio should be at or below 80% for the best possible interest rate.
How bidding wars increase the loan-to-value ratio
If the market in your area is highly competitive, don’t be surprised if houses receive multiple offers. If you find your dream home (or you’re determined to close on a house in a short period of time), you may need to offer above asking price to seal the deal.
Although this is a common practice in today’s unprecedented market conditions, buyers should know that getting into a bidding war may raise their LTV ratio. As a result, you may need to increase your down payment in order to qualify for your mortgage. This is because when a buyer pays above asking price, they’re likely paying more than the house will appraise for. If the home appraises for lower than you’ve offered, this will change your LTV ratio. In this case, you’ll have the option to come up with a larger down payment, or keep the new LTV and pay private mortgage insurance.
Purchasing a home is an exciting step that can help you secure your future. If you’re ready to buy, it’s helpful to explore your mortgage options so you can be prepared to proceed.
By Michaela Phillips. Michaela is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.443.6292, e-mail
[email protected] or visit michaelaphillips.com. NMLS: 312874.