Loan to value is a mathematical calculation and is normally expressed as a percentage. It is normally calculated by dividing the principal loan amount by the value of a property or the purchase price.
Loan to value is a key factor a lender will assess when a borrower seeks a mortgage. This value helps the lender to determine whether his / her losses can be recouped by selling the property incase of nonpayment by the borrower.
A lender will get low loan to value ratio if he / she has low credit scores, late payments on previous mortgages, high debt to income ratio or insufficient reserves. While a high loan to value ratio is kept for borrowers with high credit scores and a good repayment history.
In certain cases when the loan to value ratio is higher than 80%, lenders will ask the borrowers for a mortgage insurance. In other words, the lender is asked to put down 20% of the property value to avoid paying mortgage insurance premium. Normally the mortgage insurance amount is added to the monthly mortgage payments. If the borrower want higher loan to value amount then lenders may interpret it as the borrower not having enough income to save for a down payment or the lender is trying to buy something they can not really afford. This becomes a risk for the lender and therefore, high loan to value amounts are restricted to only those who have an excellent credit.
Loan to value ratio is also used when an investor wants to refinance a property. Most lenders give 75% of the appraised value. If lenders give more than 75%, then they will charge a high rate of interest.
A loan to value ratio is not only for borrowers. Sellers of properties should pay attention to it. If the buyer’s loan to value ratio is high while the appraised value of the property is lower then there can be a problem with the deal. A mortgage appraiser will normally take the current market value. If the market value is lower than the selling price then the lender will go for lower value when calculating the loan to value ratio.
There are different tiers for loan to value borrowing. For house purchases or refinancing, a lender can borrow up to 95% of the property value or purchase price depending on which one is lower. However, the loan to value amount will change based on the amount the borrower actually wishes to borrow.
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