Loan to Value Ratio – LTV
Loan-to-value ratio (LTV) ratio is a financial term used by mortgage lenders to indicate how risky the loan is for the lender. The higher the LTV is, the more risky the loan is for the lender. You calculate a loan-to-value ratio by dividing the value of the house by the amount of the loan.
Loan-to-value ratio is one of the key numbers a mortgage lenders considers when deciding to grant a mortgage. Mortgage companies like to see a lot of value still in the home, above the amount of money borrowed against it. Loans like that are considered less risky.
A loan-to-value ratio below 80% is less risky for the mortgage lender and as a result, people with lower credit scores are more likely to get a mortgage if the loan-to-value ration is below 80%. Full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers. The loans with LTV ratios higher than 100% are called underwater mortgages.
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