Lenders consider many factors when they review mortgage applications, including the loan-to-value ratio. You have come to the right place if you are wondering “What is the loan-to-value ratio?” It is a formula used by bankers to evaluate the risk level of each loan.
Calculation
To find this ratio, you can use specialized software or any standard four-function calculator. Simply divide the amount of money you want to borrow by the value of a home. Finally, multiply the result by 100 to obtain a percentage. This figure is your mortgage’s loan-to-value ratio.
Example
For instance, perhaps you want to make a down payment of $35,000 and borrow $150,000 to buy a $185,000 house. You can divide $150,000 by $185,000. When you multiply this number by 100, you can see that your LTV would be just over 81 percent. It is possible for an LTV to exceed 100 percent.
Importance
Lenders want low loan-to-value ratios because they are less risky. A bank can recoup its losses more easily if you have a low LTV and you stop making mortgage payments. A lender will treat you more favorably if your ratio stays below 81 percent, and an LTV under 78% is considered ideal.
Consequences
When potential borrowers have exceptionally high LTVs, a bank may reject mortgage or refinancing applications. If a lender approves an application with an LTV above 78 percent, it will probably charge a higher interest rate. The borrower may also need to pay extra fees for private mortgage insurance.
Solutions
If you want to avoid these added expenses, you have two ways to reduce the ratio. You can find and purchase a less valuable house. You might need to look at homes in a neighborhood with lower housing costs or seek a building that needs repair. On the other hand, you could save up more money and provide a larger down payment.
To sum it up, the loan-to-value ratio represents the mortgage lender’s risk level and has a major impact on the availability and/or cost of financing. This statistic can help you select a financially suitable home and identify an appropriate down payment.
Friday, May 10th, 2019, 9:08 pm | 
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