The loan to value ratio (LTV) is used by mortgage lenders to measure how much equity a borrower currently has in a home or the amount of equity they will have when they purchase a home.  The loan to value is one of the fundamental risk factors assessed by lenders before they approve a loan request.  As important as the loan to value ratio is in the loan approval process, the loan to value is a relatively easy calculation to make.

The loan to value ratio is used for both purchase transactions and refinances.  For purchase transactions, the loan to value is the mortgage loan amount divided by the appraised value or sales price of the property.  For example, if Bob is buying a house for $150,000.00 and is requesting a loan amount of $120,000.00, the loan to value is $120,000.00 divided by $150,000.00 or 0.80.  That figure is converted into a percentage to get a loan to value ratio of 80%. 

The calculation can be simplified for purchase transactions since the number is 100% minus the down payment percentage.  As another example, if Jimmy buys a house for $200,000.00 and is making a down payment in the amount of $40,000.00, the loan to value is 80% or 100% minus the 20% down payment.

In refinance transactions, the loan to value calculation is the loan amount requested divided by the appraised value of the home.  For yet another example, if Carly is refinancing an existing mortgage loan in the amount of $75,000.00 and the house appraises for $100,000.00 the loan to value is 75% or $75,000.00 divided by $100,000.00.

Low loan to value ratios are a reflection of greater equity in a home, whether it is a purchase or refinance, and is looked upon favorably by mortgage lenders.  A higher LTV ratio means less equity and higher risk for the lender.  Equity is the amount of a home’s value that is not encumbered by a mortgage loan or other debt.  Hence, mortgage lenders often have add on fees or costs for mortgage loan request that have high loan to value ratios.

The LTV ratio is not the only criteria used by mortgage lenders in assessing risk and reward but it is one of the key tools in the mortgage loan underwriting process.

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