An LTV (or loan-to-value) ratio is an important part of underwriting, and as such, deserves your understanding in order to comprehend the process of your loan.
The loan-to-value, or LTV, on a property is determined by taking the debt owed divided by the fair market value. Let’s say a house is worth $150,000 and the owner’s outstanding debt is $112,500.
$112,500 / $150,000 = 0.75 or 75%
The LTV on this property is 75%
You’ve probably seen this equation structured differently: Fair market value minus the debt owed, which equals EQUITY.
$150,000 – $112,500 = $37,500
The owner has $37,500 in equity in the home.
So why are these numbers important?
First, because it factors into determining the details of your loan, including how much money a lender can offer. All lenders evaluate the LTV to determine their level of exposed risk. This is why the value of a property alone is not enough information needed to process a loan application.
The higher the LTV, the more risk there is to a lender so the interest could be higher. The lower the LTV, the less risk to the lender, equaling a lower interest rate. Essentially, it shows if the value of the mortgage could be recovered from the value of the property. Private money lenders are also concerned with the amount of equity the borrower has invested in the property because it can be used as collateral.
The LTV is equally important for a borrower. The lower the LTV, the higher the profit margin (depending on how much cash you have to put into it). If the appraised value is higher than the amount you need as a loan to purchase a property, then that’s a better deal. It also can mean lower payments, lower interest, and bigger savings!
When you understand terms like LTV and how if factors into your loan, you can better assess a deal and whether or not it will make you money. Keep crunching those numbers, my friends, and reach out to our loan officers if you have any questions!
Happy to do business with you;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
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