The loan to value ratio or the LTV is a convenient way for the mortgage lender to measure the risk that the mortgage loan signifiers. The loan to value ratio is the ratio achieved by dividing the loan amount by the property is appraised value. For example it’s appraised value of the property is $200,000 and you take the home loan for $150,000 then the loan-to-value ratio is 75%.
The mortgage lenders like to have a lower loan to value ratio because it represents the lesser risk to them. In order to have a lower loan to value ratio the borrower has to make larger down payment. The mortgage lender considers this to be a lower risk proposal because they believe that the more money that the borrower has invested in the property the less likely he is to default on future payments. The more money that the borrower has invested in the property the less likely he is to walk away from the mortgage loan when faced with financial hardship in the future. Conversely, higher the loan to value ratio the higher the risk to the lender. Usually 20% is considered to be the magical figure for down payment. Most of the lenders feel confident in giving out a mortgage loan when the borrower makes at least 20% of the purchase price of the property is down payment. The underwriting guidelines for the LTV also differ from one lender to another. A portfolio lender may be more comfortable with a higher loan to value ratio. In the earlier years it was not uncommon for mortgage lenders to finance hundred percent of the appraised price of a property. But in the current date and times with more stringent and strict underwriting guidelines hundred percent financing is not available. Also, making less than 20% down payment on the appraised value of the property will result in additional charges such as the mandatory private mortgage insurance and even the payment of property taxes in advance for 6 months to one year to be kept in an escrow account managed by the lender.