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Loan to value
Loan to Value is a calculation that expresses the amount of a first mortgage lien as a percentage of the appraised value of real property. For example, a property that has an appraised value of $120,000 and a first mortgage of f$90,000 has a loan to value of 75%. The way to calculate the loan to value ration is by dividing the loan amount with the appraised value; in this case, it is $90000 divided by $120,000. Loan to value is one of the key risk facts that lending institutions use to assess when qualifying borrowers for a mortgage loan. Lenders consider customers with higher loan to value ratios to be more risky.
What it means is that these customers have more to pay off their loan and less down payment and less equity. Lenders are cautious about buyers that have a high possibility of going into default. Usually lenders will require customers with a high loan to value ratio to pay mortgage insurance to protect the lender from a buyer default, which results in a higher cost of mortgage. High LTV loans often mean higher interest rate. These loans are harder for customers to quality for. Some lenders will only qualify buyers with a larger income if they have a 95% LTV or higher than they would require customers who can afford a 20% cash down payment even if the loan amount for both types of customers are the same.
Sellers also have reasons to be concerned about high loan to value customers, especially if the current market value of the property has gone done. Part of approving a mortgage involves having an appraiser’s report the value of the house based on the market value. Lenders will approve a mortgage based on the appraised value. That means that if the appraised value is lower than the purchased price, the lender will give a loan based on the lower value.
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