Loan to Value (LTV) is the ratio of a loan amount to the value of a property, expressed as a percentage. High LTV loans are riskier for lenders, who may require mortgage insurance and charge higher interest rates. Appraisal value is crucial for high LTV loans, as a low appraisal can jeopardize the transaction.
Loan to Value (LTV) is a ratio that represents the relationship of a loan amount to the value of a property. This ratio is obtained by dividing the amount of a loan between the sale price of the property or the appraised value of the property. The lesser of the two amounts is used.
LTV is one of many factors used by lenders to determine whether or not to approve a mortgage. LTV is expressed as a percentage. For example, a $50,000 loan on a $100,000 home has an LTV of 50 percent. A mortgage can be said to have a high LTV when the amount of money borrowed is high relative to the borrower’s down payment or the home’s equity. For example, if a borrower provides a five percent down payment and the mortgage amount is 95 percent of the sales price, the loan is considered to have a high LTV.
Lenders generally view high LTV loans as riskier than those where borrowers offer more substantial down payments or have larger amounts of principal. From a lender’s point of view, a borrower with less money invested in a home has less to lose by defaulting on a loan than an individual who has made a larger down payment or has significant equity in a home. Borrowers of high LTV loans are often required by lenders to obtain mortgage insurance. This type of insurance helps protect the lender’s interests if the borrower defaults on the loan.
When a high LTV borrower is required to purchase mortgage insurance, the total cost of the mortgage increases. High LTV loans often have higher interest rates as well. In some cases, borrowers may find it more difficult to qualify for high LTV loans than for lower LTV loans.
An appraisal can play an important role in any type of home loan. With a high LTV loan, the appraisal value is particularly important, as it can put the transaction at risk. For example, if a buyer has a five percent down payment on a $200,000 home, he needs a loan in the amount of $190,000. If a lender agrees to make a loan for 95 percent of the appraised value and the property’s appraisal is only $195,000, the loan amount would be only $185,250. That’s $4,750 less than what the borrower needs to close on the property.
If a property is appraised for less than the amount of loan money the buyer needs, the entire real estate purchase can fall apart. However, sometimes a borrower may move the transaction to a different, more lenient lender in time to prevent the deal from falling through. Using a mortgage broker can make it easier to switch to a new lender, since brokers often have extensive contacts with the lender and can often help borrowers switch lenders fairly quickly.
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