Her loan against the value of the property is the loan-to-value ratio (LTV). The higher the LTV, the greater the chance she will face a loss if the borrower defaults and the property is sold. She would prefer a lower LTV for less risk but may have to settle for an average LTV to satisfy both herself and the borrower.
In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher loan-to-value ratios. Borrowers who have a lower loan-to-value ratio are considered less risky to lenders because they have more equity in their homes.
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A Lower LTV Ratio Means More Ownership, Better Rate. So if your mortgage rate is bumped a quarter of a percent higher for a loan-to-value ratio of 80%, that same pricing hit may be increased to a half percentage point if the LTV ratio is 90%.
Essentially, the lower the loan-to-value ratio, the better, as it means you have more ownership (home equity) in the property. Someone with more ownership is less likely to fall behind on payments or foreclose, seeing that they have a greater equity stake, aka financial interest to keep paying the mortgage each month.
The maximum allowable LTV ratio for a first mortgage is based on a. rounding methodology that results in the same or a higher LTV ratio.
Ratio of debt to value of the property. Value- if appraised value and sales price differ, the lender will use the lesser of the two to determine LTV. The lower the ratio of debt to value the higher the down payment.
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The loan to value ratio, or LTV ratio is used by lenders that represents the amount of the outstanding loan verses the market value of the property. The LTV ratio helps lenders determine risk when evaluating a borrowers mortgage application. The higher the LTV ratio is, the higher the risk for the lender.
The formula for the loan to value ratio is also used specifically in mortgages to determine if private mortgage insurance, or PMI, is required. In many cases, PMI is required on a mortgage that has a higher loan to value ratio than 80%, but individual lender programs may vary.