When buying a home, you may come across the term LTV, which is short for "loan to value". This financial term is used to define the ratio of the amount of money borrowed in a mortgage to the value of the property for which it used. Banks typically use LTV to assess risk and ultimately determine whether or not an applicant is a suitable candidate for a loan. To learn more about what is loan to value in real estate, continue reading below.
What is Loan to Value in Real Estate?
Loan to Value: The Basics
The primary purpose of LTV is to assess a home buyer's risk of default. Following the housing market crash of the early-to-mid 2000s, lenders have become increasingly conscious of whether or not borrowers are capable of paying their loans. While LTV isn't the only criteria used to assess a buyer's risk of default, it's one more tool that lenders use to determine who's approved and who doesn't qualify for a mortgage loan.
If you're planning to buy a home, you'll need to consider both the sale price of the property and the amount of money you need to borrow. As previously stated, lenders prefer borrowers with a low LTV, because it indicates a higher amount of equity in their home; thus, they are less likely to default than their counterparts with a high LTV. Generally speaking, the lower your loan's LTV, the better the rates. Mortgage loans with a low loan to value ratio typically have lower interest rates when compared to high-LTV loans.
Still confused about LTV in real estate? Here's a real-life example: if you take a $200,000 mortgage loan on a property that costs $150,000, the loan's LTV is 75% ($150,000 is 75% of the $200,000 mortgage).
It's important to note that conforming loans adhering to Fannie Mae and Freddie Mac are limited to an 80% LTV. This means home buyers can't obtain a conforming loan that's higher than 80% of the property's sale price. However, you may be able to go through a private mortgage insurance company.
Additionally, there are refinance loans available to borrowers who are upside down on their mortgage. These refinance options actually have LTVs over 100%. HARP Refinance is one such program that supports high-LTV loans.
This article was brought to you by Premier Island Properties - A full service real estate firm serving Hilton Head Island and Bluffton, South Carolina. For more real estate news, information, and interesting facts about the Lowcountry, please visit our website.
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