Mortgage Loans - LTV (Lending Risk Ratio)

When buying your home, it is imperative to have as much money as possible for your down payment. Not only should you save for your down payment, but also tap your personal savings, any stocks, bonds and real estate, and gather your family gifts. Customarily, lenders require a down payment of at least 20% of the home's purchase price, as well as require a ratio of at least 75% for your loan to be approved.

What is the LTV Ratio?

The LTV, or lending risk ratio, is determined by dividing the mortgage loan amount (after subtracting your down payment) by the value of the property. The higher your down payment, the lower this ratio will be. The lower the LTV the cheaper your mortgage costs in the end, and the better chances you have at securing your loan.

High LTV Disadvantages

If your LTV is high, it can affect your ability to secure the loan in a myriad of ways. A high LTV is a risky situation in the lender's perspective, because high LTV loans are more at risk to default. If you are competing with other buyers, the lender will most always go with the lower LTV and a larger cash down payment. It can affect your chances of buying.

If you have a high LTV, you are also most likely going to be dealing with higher interest rates and additional insurance costs to protect the lender. These extra costs will increase the cost of your mortgage in the long run and make your payments higher. If you don't have the 20 percent cash down payment, some lenders will require you to have a larger monthly income to qualify for a 95 percent LTV mortgage. The loan amount is the same, but if your down payment is low, they will need more security.

Prepare When Obtaining a Mortgage Loan

With a little preparation, and possibly some patience, you can save 20 percent or more of the home's purchase price and steer clear of the hassle and extra costs. If you find this is not possible, it may be time to look at a home with a lower price. It's better to be able to afford your home, than to tie yourself in a situation with a chance of default.