Loan To Value Ratio (LTV) Definition And How To Calculate LTV

What is Loan To Value Ratio?

Loan to Value Ratio or usually abbreviated as the LTV ratio is a risk assessment measurement that calculates the loan amount as a percentage of the collateral valuation value. In other words, LTV is a tool used to compare the intended loan amount with the value of the property purchased to evaluate the risk of a loan.

This assessment is usually carried out before a financial institution such as a bank or lender approves a mortgage application (Mortage). A loan valuation with a high LTV ratio is considered a high-risk loan.

Please to also read Understanding the Debt To Equity Ratio (DER) and the formula.

Every lender in different countries has its own terms and conditions and is slightly different from other lenders before they approve or issue a mortgage. Some lenders in certain countries will not issue mortgages at all to individuals who cannot meet the LTV ratio, while other lenders set conditions for their loans such as accommodating additional risk by raising interest rates or asking borrowers to purchase mortgage insurance.

This mortgage insurance policy, which is usually abbreviated as PMI, helps protect lenders from possible defaults on the borrower’s side.

If the borrower cannot make the payment and goes bankrupt, the insurance company will pay the lender according to the terms of the policy. PMI is an alternative for individuals who do not have enough money for a down payment because buying this mortgage insurance allows them to qualify for a loan by making certain monthly insurance premium payments.

LTV Ratio (Loan to Value Ratio) formula

The LTV or Loan to Value Ratio formula is calculated by dividing the amount of the mortgage by the appraisal value of the purchased house / property. The formula can be written in the following equation:

LTV Ratio = Total Mortgage / Property Appraisal Value

Examples of LTV Calculation Cases

John needs $ 65o K to buy a house that costs $ 900 K. John then applied for a loan from the bank of $. 650 K. The Bank performs a loan risk assessment analysis using the LTV (Loan to Value) ratio.

Answer:

LTV Ratio = Total Mortgage / Property Appraisal Value
LTV Ratio = $. 650 K / $. 900 K
LTV ratio = 0.722 or 72.22%

John LTV ratio is 72.22%, if the maximum LTV limit allowed by the Bank is 80% then it is very likely that Johni’s loan application will be approved by the Bank.

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