LTV is the comparison of the amount you want to borrow versus the appraised value of the home you are trying to purchase. This comparison is used by lenders to decide whether to approve a loan or not. LTV can also be used to determine whether you need mortgage insurance.
The higher your LTV, the greater risk you may pose to a lender.
The loan-to value ratio tells you how much you own in relation to the amount you owe for your mortgage. LTV is used most often for mortgages but can also be used for refinancing and car loans.
Lenders will not only look at the LTV. Lenders will also look at your credit score, how much you can afford to pay each month and the condition of what you are trying to purchase.
You’ll be in a much better position to obtain higher LTV loans if you have a good credit rating. You may be denied approval if you have a large LTV ratio. Or, you could have to pay a higher rate of interest. Mortgage insurance may be required, which reduces the risk of the lender.
How is the loan-to-value ratio calculated?
You can calculate the LTV ratio yourself. Divide the mortgage amount by the appraised value and then express it as a percentage.
If you bought a house with an appraised value of $100,000, and put down only $10,000. You would borrow $90,000. This leaves you with a LTV of 90%. If you made a downpayment of $20,000, your LTV would be 80%.
The more money you get from a lender, the higher your LTV and the greater the risk that they are taking.
Collateral and LTV
When the LTV calculation is used to determine a loan’s terms, it’s likely that the loan involves collateral. A loan is secured by a lien. This lien remains in place as you pay your mortgage. If you fail to make payments, your lender may take possession of the home and sell it. The goal of a lender is not to seize your property. Instead, collateral allows them to get some money back in the event you default on a loan.
The idea is that if a lender gives you only 80% of your property’s value, they will still be able to sell it at a discount and still make their money back.
Negative equity is when you get a loan for more than what you paid for the asset. A negative equity is a LTV ratio greater than 100%. It’s an underwater mortgage in that situation.
What should the LTV ratio be?
LTV is usually around 80%. You’ll need private mortgage insurance if you borrow over 80% of a house’s value. This will give your lender protection. Your lender will often let you cancel your insurance once you reach 80% LTV.
You may be able to get an FHA mortgage with only a 3% deposit, which would make your LTV at 97%. Mortgage insurance would be required, possibly for the entire term of your loan.
You can increase the LTV by getting a home equity line of credit. If the value of your house increases, then your LTV will decrease.
There is no definitive answer to the question of what LTV you should have in your mortgage loan. The closer it is to an acceptable percentage the better. However, there are many other factors which affect the decision.
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Original Blog: https://realtytimes.com/archives/item/1043363-loan-to-value-ratio-explained?rtmpage=
