Loan-to-Value Ratio (LTV)
An examination before approving a mortgage by the financial institution is known as loan-to-value ratio. It can also be known as the risk assessment that is made before a mortgage is accepted.
It must be kept in mind that high loan to values ratios are considered risky by the financial institutions and therefore it might cost the borrower more than the lower ones. It is a ratio that can assess reliability of your case or even calculate the fee that you will have to pay. A higher loan to value ratio makes the person get mortgage insurance as that mortgage might make you pay more. This ratio is very important for a lender because the risk of default is always at their forefront and that is why if the ratio is higher the lenders make increases the cost of the mortgage and makes him buy mortgage insurance so that the risk of default decreases.
The formula to measure loan to value ratio is very simple to understand. It is calculated as follow:
Loan to Value Ratio= Mortgage Amount / Appraisal Value Of the Property
The formula is very simple as it is calculated by taking the amount required for re financing or borrowing divided by the value of the property kept as mortgage. The appraised value or the market value of the property is used for the appraisal value (whichever is lower).
For example a person requires $90,000 to buy a property of $100,000. The value of ratio will become 90% which is very high as compared to average rate required by the financial institution to accept the mortgage. Therefore, it will become very unlikely for the person to get his mortgage accepted as the banks accept a maximum of 75% ratio to accept the mortgage.
Different countries have set their own standards for the value of loan to value ratio. Some consider 80% as low risk standard for confirming the loan. However whatever the value may be, it is important to understand that higher the value of loan to value ratio, higher will be the risk and the financial institution will only accept the mortgage if the property is mortgage insured.
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