What is an LTV and how does it affect the size of my mortgage loan ?

The Loan To Value (LTV) ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing.

Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment. The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds.

So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.

Lenders typically view loans with high LTVs as more risky than those in which borrowers offer more substantial down payments or have larger amounts of equity. From a lender’s point of view, a borrower with less money invested in a home has less to lose by defaulting on a loan than an individual who has given a larger down payment or who has significant equity in a property. Often, lenders require borrowers of loans with high LTVs to obtain mortgage insurance. This type of insurance helps to protect the interests of the lender if the borrower defaults on the loan.

An appraisal can play an important role in any type of mortgage loan. With a high LTV loan, the appraised value is particularly important, as it can place the transaction at risk. For example, if a buyer has a five percent down payment on a $200,000 home, he or she needs a loan in the amount of $190,000. If a lender agrees to provide a loan for 95 percent of the appraised value and the property appraisal comes in at only $195,000, the loan amount would be just $185,250. That’s $4,750 less than the borrower needs to close on the property.

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