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What Is Loan-To-Value Ratio in Real Estate?

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The loan-to-value ratio is an essential term in real estate. It is the ratio of the total loan amount compared to the price of the property. In this way, it is possible to figure out if the loan is too high or too low. Generally, the higher the loan-to-value ratio, the more risk the lender bears.

How Important Is the Loan-To-Value Ratio?

The ratio is crucial for lenders. It is a key risk factor that banks use when deciding to give out mortgages. In most instances, lenders will only lend 85% of the total real estate value. That is because you will be more likely to protect your home if you have a personal investment outside of the loan itself. Generally, the more creditworthy the borrower is, the higher the total loan percentage is. 100% loan-to-value ratio offerings are reserved for those with stellar credit ratings.

How to Calculate It

Calculating the real estate loan-to-value ratio is quite easy. If you want to buy a house worth $500,000, then you might get a loan of $400,000, which is a loan-to-value ratio of 80%. In other words, the loan figure is 80% of the total amount of money that you need to purchase the property. Furthermore, consider the combined loan-to-value ratio (CLTV). It is the total proportion of all loans against the real estate property price.

How to Get Approval

If your ratio is too high to get approval, do not worry. There are other things that you can do to lower it. First, you can pay down any outstanding loans. The total amount that you owe will decrease, along with the ratio. You can also make improvements to your home. If you do this, then the price of the property will increase. Thus, the loan-to-value ratio will decrease.

Real estate valuation can be tricky and has a lot of moving parts. Thus, always remember to get a professional appraisal.

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