Mortgage Loan Valuation. What is LTV? How it is Calculated?
Mortgage loan valuation is a term which decides how much loan amount can be disbursed to the borrowers in exchange of asset being used as collateral to the lender. The loan to value ratio is thus a financial term used by lenders to express the ratio of the mortgage loan amount to the value of the asset purchased. The Loan to value ratio, thus tells you much of a property you own and how much you are borrowing.
To explain, the complete scenario, let us imagine a case, where a person borrows a loan amount of Rs. 13 Lacs in order to purchase a home of around Rs. 15 lacs; in this case, the LTV ratio is 13 lacs/15 lacs which is equal to 87%. The remaining 13% is regarded by the term “Lender’s haircut” and is covered from the borrower’s equity. It is said that the higher is the LTV ratio, the more risk is involved in the loan deal.
The Loan to value is a tool used to evaluate the risk involved in the mortgage loan. As said, the higher is the LTV Ratio, the more risk is involved considering the lenders’ side and thus, it is being covered on the lender’s side through the way of higher rates of interest being charged to the borrowers.
Calculation of the LTV
The loan to value ratio is calculated with the simple mathematics. It is calculated by dividing the amount of loan into the total value of the asset. Most of the time, you will find out the maximum cap of around 80% for the loan amount being offered to the borrowers from the lenders side. In banks like SBI mortgage loan LTV varies according to loan amount.
What is the Advantage of Loan to Value Ratio
The loan to value ratio is a helpful factor for the lenders in understanding the risks involved in the mortgage loans. The more, the lenders amount, the more is the risk involved. The simple thing is that the mortgage loans are a secured loan, and when you are calculating the loan to value ratio, the case of putting your immovable property in return to the money you are asking from the lenders. The lenders don’t have any intention of selling your property to get their money back, but they want to get themselves in a safe position, so that they don’t lose all their money. Thus, in case, the LTV is around 80%, they can sell off your property quite easily and recover their money. Thus, the LTV ratio also helps in better evaluation of the complete scenario.
The LTV is passed depending upon the lender’s preference and policies of working. However, lower is the LTV, the more is chance at the lender’s end to approve the loan requirements. Less LTV means smaller EMI and ultimately less burden on the borrowers too.
However, the magic number for LTVs and home loan is around 80%. You can quite comfortably get the loan amount up to this number. In case, you are in need of the loan amount greater than this, you need to cover your lender through private mortgage insurance which is generally called as PMI. However, once the LTV goes below 80%, you can cancel this insurance. In some cases, the LTV ranging around 97% is also approved, but that needs to be covered through various aspects like mortgage insurance, possibly for the complete tenure of the loan period.
LTVs are just an Analysis Factor
LTVs, are in fact, not only the deciding factor in getting the loan approved or rejected. This is one of the several important aspects, which plays an important role in deciding the loan application being accepted or rejected. These are a part of the bigger scenario at the big stage, where good credit scores can also get you loans of high LTV. Your income may play another crucial role in getting an approval for the high LTV loan. Also, the quality of the property or the apprised property also plays a vital role in getting a high LTV loan. One must always keep in mind, the higher the LTV ratio, the qualification guidelines for getting an approval for loans becomes more strict and tight. Hence one must evaluate very carefully, the need and requirements of the loan amount. The higher LTVs are generally kept reserved for the people who have a good mortgage history and for those having very high credit scores. The 100% LTV is kept reserved only for those who are most credit worthy borrowers.
Availability of Several Loan to Value Calculators
With the on line process going very popular these days, the financial market is ready with availability of several calculators for different purposes. These calculators vary to meet the demands and requirements of people in different aspects and can help them in better analysis even while sitting at home. The loan to value calculator is just of them. It helps people in the loan evaluation if they have enough equity to qualify for best rates. It requires some details to be entered to find out the loan to value ratio, and the results are out within seconds.
The loan to value is the critical component of mortgage loans.. Either you are looking for the purchase of the residential property or you are looking for the mortgage loans to fulfill the needs of the existing loans, your lenders will evaluate a lot depending on the LTV ratio in order to determine the risks involved in the process. It needs to be determined carefully in order to avoid the loan going default. In case of foreclosure, the lenders have to sell off the property to cover the loan amount, and thus they must go through the analysis very minutely if they are able to cover up the loan amount or not.
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