What is a Loan to Value Ratio?
What is a loan to value ratio?
Loan to value ratio is used as a tool by a lender for the purpose of assessing its risk in connection with a loan before approving a mortgage. The loan to value ratio is calculated as follows:
LTV ratio = Mortgage Amount
Appraised Property Value
In closings, the property value is typically set at the purchase price. Essentially, the higher the ratio, the higher the risk to a lender that is approving a mortgage. This amount is generally expressed as a percentage.
The loan to value ratio can also determine how much mortgage insurance the borrower will have to pay on a loan. If the value is less than 80%, no mortgage insurance may be required in connection with conventional loans.