What is Loan to Value Ratio? What Columbus Buyers Need to Know
When you are purchasing a Columbus home it is always good to know as much about the process as possible, especially the home loan. The more educated you are about the aspects of a mortgage loan the more successful you will be in understanding what you are signing up for and confidently paying back the loan on time.
Let's look at what the loan-to-value ratio is on a mortgage loan, why it is important to know, and how it can impact a mortgage loan.
What is Loan to Value Ratio?
The loan-to-ratio value of a mortgage compares the amount of money a borrower is asking the lender to lend them with the actual market value of the asset (the home) the loan is being used for.
Using an example of a $500,000 home value, if you were to borrow $400,000 and make a down payment of $100,000 the loan-to-value ratio or LTV would be 80%.
Why Does LTV Matter for a Columbus Home Purchase?
The LTV essentially tells a lender how much protection they have when lending money for a property. Should the lender need to take full possession of the property as a result of a loan default (this is not them automatically assuming you won't make your loan payments if they thought this they wouldn't approve the loan it is just standard smart business structure to make secure lending choices.) This gives them an idea of if the loan is worth taking a risk in lending because regardless of the borrower's ability to pay, lending money is always a risk.
Where does the lower risk benefit a Columbus homebuyer trying to get a loan though? When a lender determines the loan has a lower risk factor this translates to offering a lower mortgage interest rate. Having a lower LTV is seen as less risky and can earn a borrower a lower interest rate. Making a large down payment lowers the LTV, as does negotiating a lower purchase price on a home.
If you are unable to get the LTV of a loan lower having a higher credit score is beneficial. This helps communicate to a lender you are less of a risk to loan money to.
How LTV is Calculated
A loan-to-value ratio is calculated by dividing the loan amount by the value of the asset being purchased. The formula is the loan-to-ratio value equals the loan amount divided by the asset value. Once you have this number you multiply the answer by 100 to turn it into a percentage amount.
If you have more than one loan on a property then a combined LTV is used. If you are using a home equity loan this will come into play a lender will use a combination of the mortgage on the property and the equity loan being applied for to determine a borrower's eligibility for an equity loan.
What lenders consider as ideal LTV
The majority of mortgage lenders look to keep the LTV of a loan around 80% or lower. This is why many traditional loans ask for a 20% down payment. If the LTV is above 80% a majority of lenders will require that the borrower pay for private mortgage insurance as an added protection against default. There are some loan programs that will allow a higher LTV such as USDA loans and VA loans as well as FHA loans.
When deciding what mortgage product is best for your Columbus home purchase it is always best to look at several options and talk things over with a financial advisor. If you are searching for a home in Columbus contact me. I'm here to help make Columbus homebuying as stress-free as possible.