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posted: 9/10/2011 12:01 AM

Mortgage Professor: Do you know your true loan-to-value ratio?

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Editor's note: This is the second column in a weekly series on surprises encountered while mortgage shopping. The series appears in HomesSaturday.

Last week's article made the point that when borrowers cannot lock the price quote that was instrumental in their decision to select the lender, which is usually the case in the post-crisis market, the price they finally lock is more likely to be higher than the original quote, not lower.

The major reason is lenders can usually avoid reducing the price when a reduction is called for by a decline in the market interest rates, or by an upward correction of the borrower's credit score. Most borrowers are content when the lock price is the same as the price they were quoted earlier.

The lock price can also be affected by corrections in property value and loan amount.

The lender will replace the borrower's estimate of property value with a figure drawn from an automated valuation program, but that figure could be adjusted later -- perhaps a number of weeks later -- when an appraisal becomes available.

Changes in property value may affect the price by shifting the ratio of loan amount to property value (called the "LTV") into a higher or lower band. These bands are 65.01 to 70, 70.01 to 75, 75.01 to 80, 80.01 to 85, 85.01 to 90, and 90.01 to 95. Borrowers who take a loan amount that places them at the top of an LTV band are highly vulnerable to a price increase resulting from even a small reduction in value.

For example, a borrower who believes his house is worth $100,000 and applies for a $90,000 loan has an LTV of 90 percent. If the lender corrects the value to $99,000, the LTV jumps to the next-highest band, which requires a higher mortgage price -- or perhaps outright rejection. To remain at an LTV of 90 percent, the loan amount must be reduced to $89,100, which requires a down payment increase of $900.

Of course, the corrected property value can be higher than the borrower's estimate, but if the borrower is at the top of an LTV band, the value increase required to shift him into a lower LTV band must be large. To shift the borrower in the example above to the next-lower LTV band requires a corrected property value of $105,883, or a value increase of almost 6 percent. This compares to the negligible reduction in value required to shift him into the next-highest LTV band.

On top of that, when a significant value increase does shift the borrower into a lower LTV band, the lender may ignore it -- and most borrowers won't notice.

The borrower at the top of an LTV band is also in danger of being forced into the next-higher band if she encounters unanticipated settlement costs, including escrows, and doesn't have the cash to cover them. For example, if the borrower at an LTV of 90 percent in the example must add $500 to the loan in order to cover an unanticipated expense, the LTV would jump to 90.5 percent, which places her in the higher band.

In sum, because of the tendency of borrowers to gravitate to the top of LTV bands, corrections in property value and in the loan amount are much more likely to shift borrowers into a higher-price LTV category than into a lower-price category.

Further, when corrections do shift the deal into a lower-price LTV category, the lender may not pass through the price reduction the borrower deserves. Few borrowers are alert enough to catch this.

This problem is beyond the reach of any mandatory disclosures. To be assured that they are getting the correct price, borrowers would have to have access to their lender's internal pricing system -- the same access the lender provides to its loan officers. The only lenders that do that now are the Upfront Mortgage Lenders listed on my website at, which provide borrowers with the means of continually updating their price until they lock. The network I am developing will provide the same facility covering all participating lenders.

• Contact Jack Guttentag via his website at


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