What Is A Loan To Value Ratio?

Question

Last Updated on March 31, 2021 by Ephraim Iyodo

The loan-to-value ratio (LTV) is an assessment of credit risk that financial institutions and other lenders consider before approving a mortgage.

Most lenders offer mortgage and home-equity applicants the lowest possible interest rate when the loan-to-value ratio is at or below 80%.

loan to value ratio

Measure Of The Loan To Value Ratio

Prospective home buyers can easily calculate the LTV ratio of a home. This is the formula:

LTV ratio =MA/PV
.
where:
MA = mortgage amount
APV = property value
.
.

An LTV ratio is calculated by dividing the amount borrowed by the estimated value of the property, expressed as a percentage.

For example, if you buy a house that is estimated to be worth $100,000 and make a down payment of $10,000, you are borrowing $90,000. This results in an LTV ratio of 90% (i.e. 90,000 / 100,000).

Determining an LTV ratio is an important component of underwriting mortgages.

It can be used when purchasing a home, refinancing a current mortgage into a new loan, or borrowing against accumulated equity within a property.

Lenders assess the LTV ratio to determine the risk they are taking when underwriting a mortgage.

When borrowers apply for a loan for an amount that is at or near the appraised value (and therefore has a higher LTV ratio), lenders see a greater likelihood that the loan will go into default.

This is because very little equity is built up within the property. As a result, in the event of foreclosure, it may be difficult for the lender to sell the home to the point where the outstanding mortgage balance is covered and still make a profit on the transaction.

The main factors affecting LTV ratios are the amount of the down payment, the sales price and the appraised value of a property. The lowest LTV ratio is achieved with a higher down payment and a lower sales price.

Disadvantages of Loan-to-Value (LTV)

The main disadvantage of the information provided by an LTV is that it only includes the primary mortgage owed by a homeowner and does not include other obligations of the borrower, such as a second mortgage or home equity loan, in its calculations.

Therefore, the CLTV is a more comprehensive measure of a borrower’s ability to repay a home loan.

Credit:

https://www.investopedia.com/terms/l/loantovalue.asp

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Ephraim Iyodo 4 months 0 Answers 1354 views 0

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