Loan-to-Value Ratio Explained

When determining whether or not a borrower is qualified for a home loan, lenders take many different risk factors into consideration. One thing that they look at is the loan-to-value ratio of the proposed loan. To arrive at the loan-to-value ratio, the total amount of the home loan is divided by the appraised value of the property. The resulting percentage gives lenders a clear idea about how much risk is involved for them. High LTV ratios translate into low equity, which equals increased risk for the lender. If the borrower defaults and a high LTV ratio is involved, it's a lot less likely that the lender will recoup the total amount that is owed.

The LTV ratio is just one thing that lenders consider when processing home loan applications. Like many other things, the borrower's credit score plays a role in this situation too. People with higher credit scores are often given more leeway in terms of LTV ratios. In other words, a person with an exceptional credit score is more likely to be approved with a high LTV ratio. In general, lenders require LTV ratios of 75 percent or less. Higher LTVs typically translate into higher fees, and mortgage insurance is usually required in such scenarios.