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A Loan To Value Ratio Defined

what is a loan to value ratio

A loan to value ratio (LTV) is a ratio used by mortgage lenders to figure out what amount of a mortgage they will loan you based on the appraised value of the property (or purchase price of the property, whichever of the two numbers is lower). Lenders consider the LTV ratio whether you are purchasing new property or refinancing property you currently own. The loan to value ratio may depend on the type of property – commercial or residential, or primary home, secondary home or investment property. The loan to value ratio may even vary depending on whether the property is a single family home or a condominium.

As an easy example, let’s assume that a couple is purchasing a single family primary residence. The couple walks into the local bank to apply for a mortgage. The lender tells the couple that it can loan up to an 80% loan to value on the purchase price or the appraised value of the home the couple is looking to purchase. Let’s say that the purchase price is $100,000. So, in this example, the loan to value ratio is 80:100 or 80%. Multiply the LTV ratio by the purchase to figure out

the amount of money the bank will loan. Eighty percent of $100,000 is $80,000, which means that the couple will need to come up with a down payment for the difference of $20,000.

The lower the loan to ratio value for a property, the more risk that the lender associates with the property type or borrower. So if a borrower has a low credit score, a history of making late payments, or a high debt-to-income ratio. the borrower is likely to receive a lower loan to value ratio from lenders than those borrowers with higher credit scores, who pay their mortgage on time, and have a low debt-to-income ratio.

For properties that are located in the United States, the typical LTV ratio is 80%. This is because an 80% LTV ratio allows the lenders resell the mortgage to the federal government on the secondary market. Borrowers can obtain higher loan to value ratios, but they will usually have to pay private mortgage insurance on top of their regular mortgage payment. Private mortgage insurance protects the lender since they are exposing themselves to more risk by loaning a borrower a higher loan to value ratio than they normally would.

Answered almost 9 years ago

Category: Credit

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