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How to calculate the loan-to-value ratio?

Want to Know If You Will Be Approved for a Loan? Learn About the LTV Ratio and Why it is Used By Investors.

What is an LTV ratio? A Loan-to-Value ratio calculates the amount borrowed over the value of the property’s appraisal. It is a percentage that can determine one’s standing on whether they will be approved for a loan or a mortgage by a banker or a hard money lender. Typically, a good LTV ratio is 80% or higher. If you are applying for a mortgage loan, oftentimes, you might need mortgage protection insurance (MPI) if your LTV ratio falls above 80%.


The LTV ratio is the calculation used by private lenders when considering what type of loan program is best for the borrower’s loan scenario.

LTV = Loan amount / Property value

Some of the ways LTV ratios fluctuate are in reaction to changes in one’s equity and loan balance. Technically, an LTV ratio calculates your current loan balance over your current appraisal value. And both factors can change. You can take out more credit or acquire another loan or mortgage on a property to increase the loan balance. Generally, this emerges when multiple loans are attached to a single property. As such, the LTV ratio increases to a more risky and higher level. Borrowers can also pay off some of the loan balance to decrease the LTV ratio, and this can happen naturally over time as your real estate investment acquires more equity to pay off your debts.


Another way an LTV ratio can fluctuate is with changes to the current appraisal value. You can hire a professional appraiser to accurately measure and guide your project. Some of the things they may tell you are to keep the property up to code, look nice and presentable, and, generally, meet exemplary standards of excellence that increase the property’s value. Note: look for marginal and cost-efficient ways to boost your property’s next appraisal as every detail matters. All of these factors help in lowering one’s LTV ratio as it increases your property appraisal. However, keep in mind that with fluctuating economic conditions or poor maintenance, one’s appraisal value can decrease, thus increasing one’s LTV ratio to a less than a favorable degree.


Nonetheless, the best way to lower your LTV ratio is to continuously pay off the debt through monthly, or term-based, payments as it shows consistency and reliability as a borrower. If you don’t pay on time, not only will your LTV increase but the likelihood of getting approved for another loan is lessened. So, key takeaway from the LTV ratio should be to keep track of your payments, current appraisal values, and marginal changes made to the property and total loan packages. Once this is properly incorporated into your investment strategy, your home equity line of credit and properties can thrive.

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