OfflineWhat Is The Loan To Value Ratio?
The way banks and mortgage lenders decide whether to make loans on certain houses with a certain value is not really a mysterious process, although you don't hear much from them while you're waiting for an appraisal and for a loan commitment. It can be a long, tiresome wait!
Mortgage lenders use a specific criteria to determine whether you are personally qualified for a mortgage, which all has to do with the ratio of your debts to your income. But the other part of their determination uses different criteria, it is all about the appraised value of the house, it's not about you at all.
If you want the mathematical equation of a loan-to-value ratio, simply divide the amount of the mortgage by the appraised value of a house and look at the percentage that results, which is the way a loan-to-value ratio is expressed, as a percentage. Normally, the value of the loan will be lower than the value of the house, meaning the percentage will be less than 100%. Lenders are more likely to approve loans with lower percentage rates because their risk factor is lower.
It's not impossible for a loan-to-value ratio to exceed 100%, but it is extremely risky. That means the outstanding loan is more than the market value of the house, making it very difficult to sell without additional funds to pay off the mortgage at the time of closing. While lenders are in business to make loans in order to make money, they are always concerned about their own interests in the transaction and avoiding risks. Our present mortgage crisis was caused by too many lenders approving loans with high loan-to-value ratios.
The interest rate a borrower will be required to pay over the life of the loan is affected by the loan-to-value ratio. It is determined by the lender's assessment of risk and possible loss in the case of foreclosure. And, the borrower may be required to pay for private mortgage insurance which only benefits the lender if the borrower stops making payments.
It's important to know that any loan-to-value ratio in excess of 80% means the loan must be kept as a "portfolio loan" by the lender because it's not able to be sold on the secondary loan market, and selling loans to larger financial institutions is how lenders usually make their profits within a short period of time.
I hope this information on "What Is The Loan-To-Value Ratio" helps everyone.
Leo Kingston
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"
Following is a good definition of loan to value ratio (LTV), but "appraised value" needs to be defined therein. What banks usually go by is the tax appraised value, not what an individual appraiser would put on the property, and none of the above have anything to do with the Fair Market Value (FMV).
Now days, the LTV is usually higher than what the CMV is, because housing values have fallen so much. In other words, the value of property may have fallen to $100,000, but the taxing authority (county or state) say it's still worth $125,000, and the bank may lend $125,000 on it. Hence buying a property for less than appraised or FMV and refinancing immediately for the the highest amount you can like DG and other gurus teach to make your profit up front...going in.
CAUTION: Do not borrow as much as the bank will give you, because you may not be able to resell the property for that price! You may have bought the property for 30% less than FMV, but that doesn't mean you'll be able to sell it for that and repay the bank. Now, if your holding the property and using it as a rental (better you than me), then it may be OK, but hold some money in reserve for maintenance and vacancies.
The only "value" that truly matters in any deal is the value that a buyer puts on a property - how much they are willing to pay. I know of a house that has a 5.4 million dollar FMV that is absolutely worthless - not sell-able for years, because it has no value to buyers. No one wants it, so it has no value, and, yes, the owner is still having to pay the enormous taxes on it. It will probably wind up is a tax foreclosure.
Loan To Value Ratio:
http://en.wikipedia.org/wiki/Loan-to-value_ratio
Rick Allison, Realtor
Amarillo, Texas USA
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