Loan to Value Ratio
The Loan to Value ratio is one of the key risk factors lenders use to qualify borrowers for a mortgage loan. The less equity a borrower has in a a new home the greater risk the lender takes in granting the loan. The LTV ratio is a simple ratio to express this risk measurement. The calculation is: (Loan Amount = Purchase Price - Down Payment)/ Purchase Price. The higher the LTV the greater the risk to the bank which results in the borrower receiving stricter loan terms, higher interest rates, or both. It may even result in the borrower not qualifying for the mortgage loan at all. Only the most credit worthy borrowers will receive loans with favorable terms and low interest rates when they have a high LTV ratio.