stay within the appraised value
understanding the process
You need to keep the loan request amount within the appraised value of the property and the surrounding neighborhood.
Lenders will not approve you for a $300,000 home purchase mortgage (or refi financing) if comparable homes within the area are valued at $120,000 or less.
Regardless of what you are willing to pay for the home, lenders would be taking a sizable risk if you defaulted on the loan.
Most lenders qualify loan amounts at 80% LTV,
which means that they will underwrite a loan that is 80% of the appraised or purchase value of the home (whichever is lesser in most cases).
This requires the home buyer to raise the other 20% — your down payment. The 80% LTV rule protects the bank in the event of market declines.
The 80/20 rule also forces the home buyer to have some vested interest in their home purchase. With a 20% equity position, home buyers are more likely to keep the home value up by making repairs and improvements.
90/10 and 95/5 Loans Available
There are some mortgage products that allow lenders to lower the 80/20 rule — meaning that the lender will approve loan amounts at 85%, 90%LTV or more.
Banks view these loans as more risky and will charge higher rates and/or points to underwrite the loan. These loans will also require Private Mortgage Insurace (PMI), which can add to the total cost of your mortgage loan payment.
