The loan to value ratio (LTV) of a property is a quotient
determines amount could be financed. It clearly reveals the amount of equity
you have in your property.
For example, assume you buy a home worth $100,000. If your investor
agrees for $85,000 for mortgage, the loan to value ratio is 80% (because your
loan of $80,000 is 80% of the home's total value). If we calculate by
dividing the loan value into the property value, the LTV ratio is 85,000/100,000 = 0.85.
Higher loan to value ratios mean the lender risks higher. The
lender can foreclose on your home or sell it if you fail to pay back a home
loan. Their job will be more difficult because your loan to value ratio is high.
If they have to sell for a higher price their job is more difficult. On the
other hand, if you've borrowed only a less percentage of a property's value, say
may be 40%, the investor could sale it for a less to recover his mortgage
money. So, less the LTV ratio, chances are good that your lender will get their
money back will be more interested to invest; High the LTV ratio the risk is
higher for the investor.
In addition to the loan-to-value ratio, lenders also consider
several other factors while deciding approval for a loan. Your credit history
is the most important factor - the details about your borrowing money and loan
repayment. You must have to have a good credit score above your LTV ratio. It
is even possible to borrow more than 100% of a property's value if the borrower
thinks your credit is good.
The debt-to-income ratio is another
important factor that determines the quotient of your earnings relative to spending
on loan payments of each month. But in fact we all want to keep this number as low
as possible to enjoy comfort in your monthly budget.
Different kind of lender requirements determine possibility
of a loan whether to be granted with a certain LTV. If the property is occupied
by the owner lenders allow higher LTV ratio and it might even get loans at around
80%.
On an average, lenders expect real estate properties with
higher LTV for investment. Lenders want borrower to invest the maximum possible
amount into a real estate property, as this will lead borrowers to work hard
even more to save the property from foreclosure and their corresponding equity
loss.
Conventionally, owners put their best effort to keep their
mortgages current and foreclosure away without losing their homes. They do not
want to lose roofs over their head so the investor. The purchase of a property
with a certain required return on investment leads the investor to do so. Hence,
for the primary residences, the home buyers enjoy LTV's from 80% to even 100%
with the right credit rating. But, if the rental income drops, an investor
would be more likely to let the property go. In case, if they are suppose to take
the property back, the lower LTV ratio will make the sell smooth and get their
investment back in a easier way.
The vacation home buyers may not consider themselves as investor
nor the lenders, as a home owner in their primary residence, also considers
them the same; they have to put up more of a down payment to result in a lower
LTV.
All the lenders want to do is to make loans or make money in
their business.
The loan-to-value ratio is required for granting a loan based
on the lender's experience with similar kind of property and buyer. They want
the buyer to stick with the mortgage and stay out of foreclosure. But, if somehow,
the foreclosure would become necessary, lower LTV makes better chance of
recouping the lender's investment.
