LTV is an important factor for lenders when determining the risk associated with lending money for a property purchase.
The higher the LTV, the riskier the loan is for the lender, and as a result, the borrower may face higher interest rates and stricter loan terms, or in some cases, their loan application may be denied.
The loan amount is divided by the assessed value of the property to determine the LTV.
For instance, the LTV would be 80% if the loan was for $80,000 and the property had a $100,000 appraised value.
Lenders have different LTV requirements depending on the type of loan and the borrower’s financial situation.
Conventional loans typically have an LTV requirement of 80%, which means the borrower is required to put down a 20% down payment.
For Federal Housing Administration (FHA) loans, the LTV requirement can be as low as 3.5%
which means the borrower can put down a smaller down payment but will have to pay for mortgage insurance.