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Loan to Value Ratio or LTV Ratio

Loan to Value Ratio or LTV Ratio

A crucial factor that lenders use to evaluate the risk involved in approving a mortgage. It measures the amount of money borrowed compared to the value of the property that secures the loan. For example, if a borrower wants to purchase a home worth $300,000 and borrows $240,000, the LTV ratio would be 80%. Generally, lenders prefer lower LTV ratios because they represent less risk for the lender. A higher LTV ratio may result in a higher interest rate or require the borrower to purchase private mortgage insurance (PMI) to protect the lender in case of default. By examining the LTV ratio, lenders can make informed lending decisions, assess the likelihood of default, and determine the appropriate terms and conditions for a mortgage. Overall, it is essential for borrowers to understand how the LTV ratio works and how it affects their mortgage approvals and repayment terms.
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