Loan-to-Value Ratio (LTV) is a critical term in the mortgage lending industry. It is the ratio between the mortgage loan amount and the appraised value of the property. It’s a key indicator of risk for lenders. An LTV ratio is calculated by dividing the loan amount by the property’s value. For example, if you’re borrowing $90,000 for a home valued at $100,000, the LTV ratio is 90%.
LTV is crucial for lenders as it determines the level of risk associated with the loan. A high LTV ratio indicates a higher risk, as it suggests the borrower has less equity in the property. Typically, lenders set maximum LTV limits, and borrowers must meet these to qualify for a loan.
A higher LTV often results in higher interest rates, as it’s considered a riskier loan. If the LTV is high, lenders may also require the borrower to purchase Private Mortgage Insurance (PMI), adding to the cost of the loan. PMI protects the lender if the borrower defaults on the loan.
Most lenders prefer an LTV of 80% or lower, offering the best interest rates to these applicants. In contrast, higher LTV ratios lead to more expensive loans for borrowers. Certain programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible allow LTV ratios up to 97%, but they require PMI until the ratio drops below 80%.
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