HOW TO COMPUTE 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.