FHA Loan to Value Calculations
July 6, 2015
We answer questions on a daily basis about FHA home loans, FHA refinance loans, and how these transactions are handled. One version of a common question about down payments and Loan-To-Value (LTV) ratios goes like this:
“Is the LTV calculated on the total loan amount (base loan+MIP), or the base loan amount only?”
The FHA loan rules found in HUD 4155.1 do address how LTV is calculated. In Chapter Two Section A, we find the following instructions to the lender:
“The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s
–sales price, subject to certain required adjustments, or
–appraised value.
In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”
That means the LTV is basically 100% of the mortgage amount minus the borrower’s 3.5% cash investment. The LTV would be 96.5% in cases where maximum financing is approved.
That 3.5% investment, better known as the borrower’s down payment, is also covered in Chapter Two Section A, which adds some important details an FHA loan applicant should know about when planning for a new FHA loan:
“Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.”
What about the Up Front Mortgage Insurance Premium issue as mentioned in our frequently asked question above?
“Most FHA mortgages require the payment of an upfront mortgage insurance premium (UFMIP). The statutory loan amounts and LTV limits discussed in this handbook do not include the UFMIP.”
That means the 96.5% LTV (as previously explained above) is calculated without adding the amount of the UFMIP.
Do you need additional help calculating or understanding the LTV on your FHA home loan? Mention your concerns to your loan officer, especially if you aren’t sure how much down payment you might be required for the transaction.
“Is the LTV calculated on the total loan amount (base loan+MIP), or the base loan amount only?”
The FHA loan rules found in HUD 4155.1 do address how LTV is calculated. In Chapter Two Section A, we find the following instructions to the lender:
“The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s
–sales price, subject to certain required adjustments, or
–appraised value.
In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”
That means the LTV is basically 100% of the mortgage amount minus the borrower’s 3.5% cash investment. The LTV would be 96.5% in cases where maximum financing is approved.
That 3.5% investment, better known as the borrower’s down payment, is also covered in Chapter Two Section A, which adds some important details an FHA loan applicant should know about when planning for a new FHA loan:
“Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.”
What about the Up Front Mortgage Insurance Premium issue as mentioned in our frequently asked question above?
“Most FHA mortgages require the payment of an upfront mortgage insurance premium (UFMIP). The statutory loan amounts and LTV limits discussed in this handbook do not include the UFMIP.”
That means the 96.5% LTV (as previously explained above) is calculated without adding the amount of the UFMIP.
Do you need additional help calculating or understanding the LTV on your FHA home loan? Mention your concerns to your loan officer, especially if you aren’t sure how much down payment you might be required for the transaction.
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