Loan-to-value Ratio

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.