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How to COmpute for Loan-To-Value Ratio



T      he computation of loan-to-value ratios is important to banking and finance organizations. Banks
       rarely lend money that's equal to the amount needed by borrowers to buy real property or construct
a house. Most financial institution prefer to give an amount that's equal to or less than 80% of the
property's actual value, which is the agreed selling price between buyer and seller, or the recent market
value of the property. Even when the loan is way below the required percentage, lenders prefer to use the
lowest value between the property value and the purchase price when calculating home loan ratios.

Property owners looking to use their home or land
to secure a loan should ask for a thorough
appraisal   before   submitting    an    application.
Meanwhile, people looking to buy a new home or
vacant land to develop should confirm the final
price asked for by the seller before going for a loan
application. These amounts will be used in the
formula for the loan-to-value ratio, which is
commonly abbreviated as LVR or LTV. Usually, a
downpayment of 20% is expected from the
borrower before the loan can be released. Some
banks may require their borrowers to have 5% of
the property value in genuine savings.                  Photo Credit: nikcname via Compfight under Creative Commons

Let's take for example the situation of James. He wants to buy a house and lot, which have been assessed
with a property value of $100,000 after depreciation and taxes, but actually sells only for $80,000 in the
market because of its location and the effects of economic recession. James and the seller closed the deal
at $80,000 for the house and the land it stands on. In this case, lenders prefer to use the purchase price of
the property rather than its appraised value when computing for the LTV ratio.

For a single loan, the computation is very simple. If you were James, then you should multiply $80,000
by 0.80 to get the LVR. This means the borrower is expected to apply for a loan or loans equal to or less
than $64,000 in total. Only people with a high credit rating with a spotless credit history can request for a
loan higher than the recommended amount. For multiple loans, the LTV ratio is computed using the total
of all loans requested. For example, one loan is for $15,000 while another loan is made for $25,000,
which totals to a 50% ratio. This is a low-risk proposition that most finance corporations and mortgage
companies may approve.

About The Author
Michael Bishkek writes all about home loans - the application process, requirements, problems, and
solutions - at Want Home Loans blog. Find out the loan-to-value ratio of the property before using it for a
loan application.

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