Loan to value (LTV) ratio is a financial term commonly used by lenders especially in the world of real estate. It is an assessment of risk that mortgage providers and lenders examine when a borrower applies for a mortgage. It measures the difference between the loan amount and the market value of the property. LTV’s are also used not only when buying a new property but also when refinancing.
The different factors that affect the LTV rate are the sales price of a property, its appraised value, and the scope of the downpayment.
Example: If someone wants to purchase a property valued at $200,000 and puts down a $40,000 downpayment, they will borrow $160,000. This means that the LTV ratio will be 80% for the property.
The higher the LTV ratio, the higher the risk for the mortgage provider or lender and vice versa. The tipping point for many lenders is 80% LTV. Many mortgage providers will not usually approve a mortgage if the LTV is above 80% in the United States. In some cases of a high LTV mortgage, Lenders Mortgage Insurance will be required.
Usually the lower the LTV, the higher the chance that a mortgage will be approved. Other factors such as credit score and income are also considered by mortgage lenders.
The LTV is also important for lenders and mortgage providers to calculate the rate of interest given to the borrower. The Higher the LTV the more interest a borrower would have to pay in their monthly payments.