Loan to Value
“To lend or not to lend” is the Lender’s question
Loan to value
Loan to value (LTV) is one of the key issues a lender needs to resolve before they make the loan. If the mortgage has a high loan to value it may not meet the guidelines of the mortgage. The loan to value ratio must meet the requirements of the lender for a particular loan.
Mortgage lenders are very careful in assessing risk factors for each mortgage applicant. The lender is essentially agreeing to become a partner to each homebuyer, and in turn the lending institution is completing their due diligence in verifying the risk factor. The LTV is a major risk factor that they evaluate. The important aspect of the loan to value is that it is appropriate for the loan which is being applied. The qualification guidelines for certain mortgage programs have become much stricter.
What is loan to value ratio? The loan to value or LTV ratio of a property is the percentage of the property's value that is mortgaged. The LTV ratio is relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
The two key aspects are that the LTV is a ratio and that it is the appraised value that sets the value. The ratio is set by the formula: Loan Value Ratio = the mortgage amount divided by the Appraised value of the property.
An example of the LTV ratio is:
$400,000 mortgage on the property.
$500,000 appraised value of a home.
$400,000 / $500,000 = .80 or 80% Loan to Value Ratio
The appraised value sets the value for the loan not the purchase price. This is a source major misunderstanding for many home buyers. The appraised value is an opinion of a trained property evaluator. They can and do make many mistakes in setting the value of property. But the lender will go by the appraised value when setting the LTV not the purchase price.
A lending risk assessment is done before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk. The mortgage can be accepted but the loan will generally cost the borrower more to borrow. And in many cases they will need to purchase mortgage insurance to make the loan.
Lenders will evaluate your loan-to-value ratio while they are underwriting your loan. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher LTV ratios. Mortgages with a lower LTV ratio are considered less risky to lenders because they have more equity in their homes. The more equity means the borrower is less likely to default on their mortgage. But if they do default the property will have less loan value at foreclosure and the lender has a better chance of not losing money.
Financial institutions utilize LTV ratios before approving a mortgage application. Understanding what the LTV ratio is will aid in knowing if the loan will be approved or if expensive mortgage insurance will be needed. Working with a mortgage professional can help with the details of the LTV and how it fits in with the loan product and lender. LTV is a big part of the decision if a lender will make the loan or not. Knowledge is power.
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