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Beginner's Guide to Loan to Value Ratio Using Technology: All You Need to Know

5 November, 2020 Technology

Beginner's Guide to Loan to Value Ratio Using Technology

 

Loans have always helped people to achieve their financial goals or take care of emergencies. Although the lenders get a profit from the interest paid, they are always at the risk of losing their money. To avoid this, many of them require some form of security such as an asset.

 

When an asset is used, an appraisal is conducted to assess its value. This could be an existing property or the one you actually intend to buy with the loan you are applying for. The portion of the asset that is used to secure the loan is called the loan to value (LTV) ratio.

 

For those who are used to applying for loans, this might not be new, but for newbies, there is a lot to learn to understand how the loan to value ratio works.

 

Understanding the Loan to Value Ratio

It should be clear to the borrower what the loan to value ratio means. It will show you how much of the property you own and how much the lender can claim should you default on paying. If your outstanding loan equals half the value of the property you have used as a security, then the LTV ratio is 50%. Simply, the loan to value ratio is calculated as follows.

 

Outstanding loan/value of the appraised property x 100.

 

It applies to different types of lending such as land and home loans, asset financing, and business loans to mention a few. Hence, you need to negotiate with your lender to determine how you will go about it.

 

How Loan to Value Ratio Works

When lenders provide an amount of money near the value of your property, they consider it a higher risk. Hence, they must consider other factors on top of the loan to value ratio to get an assurance that you will pay.

  • Your monthly income - Whether you own a business or are employed by one, a stable monthly income is a plus. The lender will ask for a bank statement or any other document that proves your financial stability.
  • Credit score - Even with a property, the lender might want to know your past credit history. A stable credit score is a plus since it shows that you have been paying your loans and bills well. If yours is low, you need to start working on improving it.

 

Does the Loan to Value Ratio Affect Interest?

Loans that are considered high risk generally have a higher interest rate anywhere in the world. That said, mortgage borrowers with a loan to value ratio of over 80% understandably should pay a higher interest rate. In such a case, the borrower is also required to obtain insurance coverage to protect the lender from loss. With this, the lender can offer a lower interest rate because some risk is mitigated.

 

Borrowers with an LTV ratio of 50% and below are in a position to negotiate a good interest rate even without insurance coverage. After all, the lender can easily recover their money from the sale of the asset at an auction.

 

Other Things to Know

There is no definite loan to value ratio that will warrant or deny you a loan. Homebuyers can get financing even at an LTV ratio of 95% if they pay for insurance coverage. Hence, the final decision lies with the lender; they assess numerous factors before they give you a loan. So, all you need is to apply in the right way and wait for the lender to process your application.

 

As you can see, getting a loan with a loan to value ratio that is appropriate to your situation is not rocket science. Your lender will check many other things, and if they find these compelling enough, they will grant you the loan.

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