General Real Estate Library Articles on home buying, selling, marketing and 203k Consulting
Real Estate Terms Explained: LTVby Al Susoeff
This is another excerpt from an upcoming book and set of training tools I am working on. Feel free to comment all you want; that's what will help me make this product better for all my students!
Loan to Value Ratio (LTV) Loan-to-value (LTV) is a ratio that depicts the relationship of a loan amount with the value of a property. This ratio is obtained by dividing the amount of a loan by either the sale price of the property or the property’s appraised value. The lower of the two amounts is used.
LTV is one of the many factors used by lenders in determining whether or not to approve a mortgage. LTV is expresses as a percentage. For example, a loan of $50,000 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 lent is high in relation to the down payment of the borrower or the equity held in the property. For example, if a borrower provides a down payment of five percent and the mortgaged amount is 95 percent of the sale price, the loan is considered to have a high LTV.
Lenders typically view loans with high LTVs as more risky than those in which borrowers offer more substantial down payments or have larger amounts of equity. 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 given a larger down payment or who has significant equity in a property. Often, lenders require borrowers of loans with high LTVs to obtain mortgage insurance. This type of insurance helps to protect the interests of the lender if the borrower defaults on the loan.
When the borrower of a high LTV loan is required to purchase mortgage insurance, the total cost of the mortgage is increased. High LTV loans often carry higher interest rates as well. In some cases, borrowers may find it more difficult to qualify for high LTV loans than for loans with lower LTVs.
An appraisal can play an important role in any type of mortgage loan. With a high LTV loan, the appraised value is particularly important, as it can place the transaction at risk. For example, if a buyer has a five percent down payment on a $200,000 home, he or she needs a loan in the amount of $190,000. If a lender agrees to provide a loan for 95 percent of the appraised value and the property appraisal comes in at only $195,000, the loan amount would be just $185,250. That’s $4,750 less than the borrower needs to close on the property.
Al Susoeff, Jr. is a Real Estate Investor, Trainer, Coach, Author and Civil Engineer from Central Arkansas. You can read more of his articles at www.ASusoeff.com