How a Lower Loan to Value Ratio Benefits a Homeowner

Many people do not understand loan to value ratio, or even realize that this is an important factor when applying for a mortgage loan or refinancing on their homes.

Typically, a LTV ratio of 80% or lower is beneficial for those wanting to buy a home or refinance their mortgage. The lower this number, the less risk the lender is under. This means that a lender is more likely to grant the loan as he/she is at only a small risk of default on the part of the buyer.

What is a loan to value ratio?

Calculating this figure helps the lender determine whether granting a loan will put the lender at a high risk. Typically, the higher the LTV ratio, the higher the chances of the borrower defaulting on the loan.

To determine the loan to value ratio, the loan amount is divided by the appraised value of the property. The resulting number is the ratio, which is used by lenders to assess their risks and help determine whether a loan will be granted, interest rates and whether PMI insurance will be required.

Relationship of LTV ratio and equity

The lower the loan to value ratio, the better for both parties. This means that you, and the homeowner, have more ownership or equity in your property, and the lender as at a decreased risk of default - which means the lender is more likely to grant the loan.

Those who have an LTV ratio of 80% or less are usually required to place 20% of the value of the home as a down payment, which means instant equity for the borrower. While having a low loan to value ratio is desired, it does not necessary guarantee approval for a loan.

Other benefits of a low loan to value ratio

Lenders generally grant loans to those with a low LTV ratio, particularly if they also have a good credit history. For the home or property buyer, a low ratio often means lower interest rates as well.

It is important that you understand that while loan to value ratios are an important factor in determining if you will be approved for a loan and how high the mortgage payments may be, this is not the only factor considered. Most lenders review income and credit history as well before making a final decision.