subject: Understanding the Significance of Loan to Value Ratio [print this page] Understanding the Significance of Loan to Value Ratio
The loan to value ratio is often ignored by homebuyers. For most people, the interest rates and loan terms are more important. Remember that the LTV is a key factor that will determine the outcome of your mortgage application.
If you closely look at the business practice of mortgage lenders, you will never fail to notice their similarities with odds makers. Lenders calculate the odds on various outcomes for every loan application they process.
Typically, they analyze the odds that you will meet the regular payment of the loan. Lenders also calculate the odds if you can manage your total current debts and the loan that you are applying for. Aside from these, lenders will try to determine if you can sustain your current income on a continual basis.
In the mortgage industry, the odds are reflected in the loan terms. The overall result of these odds will give the lender a clear overview if you are a good risk. The lender can also determine if the odds are not in their favor after evaluating the information you provided.
The Loan to Value Ratio
The loan to value ratio is a common tool used by mortgage lenders for evaluation. This is an important aspect that plays a crucial role in your application. In the mortgage, industry, the loan to value ratio is popularly known as LTV.
Calculating the LTV is very simple. It is the value of the home divided by the loan amount that you want to get to finance it. For example, if the total value of a home is $400,000 and the loan amount is $300,000, then the LTV is 75 percent. These figures mean that you are ready to put up $100,000 as down payment for the house. You have to take note that the value of the home is not the purchase price but the appraised value.
The Importance of Loan to Value Ratio
As mentioned earlier, the loan to value ratio is often overlooked by homebuyers when they try to obtain a loan. You have to remember that the LTV can become a critical factor that will influence lenders to deny or approve your loan application.
The LTV ratio is a reflection of your credibility. That is because almost all lenders will view you as a credible borrower if you contribute a significant amount of your own money on the property. In simple terms, if you put up a higher down payment, then your lender will generally trust you.
The loan to value ratio also shows that you are determined and serious about the purchase. In the example provided, 25 percent represent a significant value which could minimize the risk of the lender. If you default on your payments, your lenders will be left with enough value to recover their investment. Furthermore, you are also shouldering the depreciation of the home and not the lender. In other words, a higher LTV could boost the confidence of the lender in giving you the loan.
You must never ignore LTV calculations. This component of the loan has significant impact on your mortgage application. You can get an easy approval if the LTV ratio is acceptable to lenders.
