What is loan to value ratio?

The way banks and mortgage lenders decide whether to make loans on certain houses with a certain value is not really a mysterious process, although you don't hear much from them while you're waiting for an appraisal and for a loan commitment. It can be a long, tiresome wait!

Mortgage lenders use a specific criteria to determine whether you are personally qualified for a mortgage, which all has to do with the ratio of your debts to your income. But the other part of their determination uses different criteria, it is all about the appraised value of the house, it's not about you at all.

If you want the mathematical equation of a loan-to-value ratio, simply divide the amount of the mortgage by the appraised value of a house and look at the percentage that results, which is the way a loan-to-value ratio is expressed, as a percentage. Normally, the value of the loan will be lower than the value of the house, meaning the percentage will be less than 100%. Lenders are more likely to approve loans with lower percentage rates because their risk factor is lower.

It's not impossible for a loan-to-value ratio to exceed 100%, but it is extremely risky. That means the outstanding loan is more than the market value of the house, making it very difficult to sell without additional funds to pay off the mortgage at the time of closing. While lenders are in business to make loans in order to make money, they are always concerned about their own interests in the transaction and avoiding risks. Our present mortgage crisis was caused by too many lenders approving loans with high loan-to-value ratios.

The interest rate a borrower will be required to pay over the life of the loan is affected by the loan-to-value ratio. It is determined by the lender's assessment of risk and possible loss in the case of foreclosure. And, the borrower may be required to pay for private mortgage insurance which only benefits the lender if the borrower stops making payments.

It's important to know that any loan-to-value ratio in excess of 80% means the loan must be kept as a "portfolio loan" by the lender because it's not saleable on the secondary loan market, and selling loans to larger financial institutions is how lenders usually make their profits within a short period of time.

I hope this information on "What Is The Loan-To-Value Ratio" helps everyone.

Leo Kingston has the solution for those with the question, "How can I sell my home?. Leo is based in Oklahoma City and has over 3 decades. He pays cash for homes and has no closing costs or other fees which he charges the house owner.