Amount of the Loan
The amount of money you need to borrow can have a profound effect on the
interest rate in question.
That’s because there are two kinds of mortgages: conventional and jumbo.
Conventional loans can be sold in the government-supported wholesale aftermarket.
This makes the loan less risky for the lender—regardless of your credit
situation.
One of the main guidelines for a conventional mortgage is that it can’t
be too large. In 2004, it couldn’t be more than $333,700 ($500,550
in Alaska, Hawaii and the U.S. Virgin Islands).
If your home loan is larger than the conventional limit, you’ll be
shopping for a jumbo loan—and you’ll be paying a higher interest
rate. Also, your credit score will play a bigger part in the bank’s
decision whether to make the loan.
The amount of the loan is important for another reason, too: Lenders look
at the home’s loan-to-value (LTV) ratio when making decisions.
Most lenders have pretty strict guidelines, when it comes to loan-to-value
ratio—but they can vary from lender to lender. A maximum LTV ratio of
80 is pretty common. (There are lenders that will loan 90, 100 and even 125
percent of the home’s value, in some cases. You have to have a relatively
high credit score for these loans and, even then, they come with very high
interest rates.)
If you’re planning to purchase a $100,000 house and the lender only
allows an LTV ratio of 80, the maximum you can borrow is $80,000. If your
credit is poor, the lender may require a lower LTV—which means you’ll
have to make a bigger down payment.
The value part of the equation is determined by an appraisal. If the house
you are interested in buying appraises for less than the price you agreed
to pay, you may have to come up with more cash for the down payment in order
to satisfy the LTV ratio (or find a lender with more lenient LTV guidelines).
Next: The Down Payment |
