Thus, it is important to check the availability of funds with yourself, and based on that only you should apply for a loan. As far as borrowers are concerned, the higher ratio will attract a higher rate of interest and also the chances of loan approval become complicated.It is for this reason that a combined loan to value ratio is considered to be more useful. But it does not take into account other considerations such as a secondary mortgage. The ratio considers only the primary mortgage involved in the loan.The loan gets approved earlier and with ease if the ratio is on the lower side.The borrowers with a lower ratio enjoy beneficial rates of interest along with other benefits.It helps lenders to analyze the risk involved in granting mortgage-based loans to borrowers.This is because there is less amount of equity contributed by the borrower and hence the chances of non-repayment are high! Advantages On the other hand, if the loan to value ratio for a loan is high, there are minimum chances of the loan getting approved since there is a greater amount of risk involved here. ownership in the asset and as such a lower ratio will represent that you have a greater amount of equity in the said asset. The ratio also represents one’s equity i.e. Also, in case of a lower ratio the borrower can negotiate for other terms of the loan such as interest rates since due to the lower ratio, the loan is less risky. However, the bank will also consider other facts such as credit score, repayment history, and so on before approving the loan.įor banks, a lower ratio is always better and thus for a loan with a lower ratio, the chances for approval will be higher. The ratio forms the basis for a bank’s decision as to whether the loan can be approved or not. Many banks and even some financial regulators may define the maximum ratio as an eligibility criterion for availing of a loan. By analyzing this ratio, the lender would like to assure itself that they do not lend more than the actual value of the property (which is represented by mortgage value in the formula). It helps the lenders to determine the risk involved in the lending considering the value of the property. The ratio is of very importance to the lenders. In case the LTV ratio exceeds 100% (known as an underwater mortgage) then the borrower may be deprived of the tax benefits of the loan.The borrower may be required to purchase private mortgage insurance if the LTV ratio exceeds 80%.The lenders may charge a relatively higher interest rate that will eventually increase the total amount to be paid by the borrower.Risk for LTV RatioĪlthough the LTV ratio is a very useful metric for lenders, there are a few downsides that are applicable in the case of a high LTV ratio. Therefore, the LTV ratio of the loan to be availed of by David is 75%. Loan to Value Ratio = Mortgage Amount / Appraised Value Loan to Value Ratio is calculated using the formula given below.
0 Comments
Leave a Reply. |