Loan To Value Ratio (LTV)

Loan To Value Ratio (LTV) Formula | Analysis | Example Calculation

Loan To Value Ratio (LTV)

Table of Contents

What is Loan TO Value (LTV)?

Definition: Loan to value (LTV) ratio is known as the risk assessment measurement.Loan To Value Ratio (LTV) For the calculation of loan amount as a percentage of the appraised value of collateral, this ratio is used.

In other words for the comparison of the proposed loan amount with the value of the property which is being purchased in order to calculate the risk, loan to value ratio is used.

For any type of loans, LTV formula can be used. Mostly this is used in mortgage industries, banks, and for many financial loans.

During the mortgage application process, industries use this formula to find the down payment which requires for the purchasing of a home.

Before the issuance of the mortgage, every lender has different requirements. Some lender does not issue the mortgage to the individual which have not maximum LTV whereas some issue the mortgage by adding the risk such as by increasing the interest or instruct the borrower to purchase the mortgage insurance.

This private mortgage policy abbreviated as PMI. If the borrower goes bankrupt then it is the duty of insurance company to pay the lender according to the policy terms.

Through this individual can make the monthly insurance payment from the mortgage payment. For the individual, this is the alternative by using which individual can qualify for the loan.

Formula

Loan to value (LTV) ratio formula can be calculated by dividing the mortgage amount by appraised value of payment as

Loan to value ratio = mortgage amount/Appraised value of the property

Appraised value in the above equation is the selling price of the object which is being sold.

Analysis

Every company set the loan to value limit according to their will. But the average rate in the US is 80%. so the issue mortgage value can’t greater than 80% of the appraising value of the home.

For the approval of the mortgage greater than 80 % value of the home borrower need to pay additional specific credit scores such as high-interest rate and PMI.

For the evaluation of risks in the lending mortgage, only LTV ratio is used. For every investment for the increment of risks interest, increase on that investment. With decreasing of the collateral the loan becomes riskier.

Example

To get a job and want to purchase a new house near the job office. Value of that house is 250,000 Dollars. Bank requires 80% LTV ratio. For the calculation of the down payment, Tom used the loan to value calculator.

80% = $200,000 /$250,000

From the above result, we know that $50,000 dollars down payment tom need to get approval for the loan.

For more Financial Ratio Check: 

Interest coverage ratio

Internal Rate of Return (IRR)

Inventory turnover ratio

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