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Loan-to-Value (LTV) ratio is a formula used to calculate the ratio between the loan and the appraised value of the real estate. Mortgage lenders look at this number to determine a borrower’s eligibility for a loan.
LTV provides a straightforward calculation for the lender to see how much risk they are taking on a collateral-based loan.
The higher the LTV is, the riskier the loan is for the lender as it provides less cushion in case something goes wrong with the collateral or the borrower’s ability to repay the loan.
In order to calculate LTV, you need to gather the following information:
The appraised value can be provided by a licensed real estate appraiser.
Example: Let’s say the borrower’s loan amount is $100,000, and the value of the property is $200,000. Then the LTV is ($100,000/$200,000) * 100 = 50%
The lower the LTV is, the higher the chances of getting a loan at a decent interest rate. Lenders like to see that the portfolio is secured and to have enough buffer built in.
Most lenders increase the interest rate with the increase in LTV. This makes sense because they are taking more risk on a particular property.
The level of risk that a lender is willing to accept is dependent on the type of product the lender provides.
Higher risk always equates to higher interest rates and closing points. In general, for a long term investment it’s a good idea to keep LTV lower to reduce the cost of loan.
Always, look for a lender who is transparent and declares all the costs upfront.
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Mohit Anchlia