Loan to value-Borrower Risk Assessment

Loan to value is the ratio of fair value of an asset to the value of the loan that will finance a purchase. It is an indicator for a safety measure for the lender that in case of nonpayment the asset could be sold for recoupment.

Loan to Value can also be viewed as a first mortgage lien as percentage of appraised value of real property. It is one of the key risk factor that the lender assesses a borrower for qualifying for a mortgage agreement. Loan to Value takes into account the default risk calculations into account from the point of view of a lender. As Loan to Value increases the mortgage guidelines become stricter. In that case borrower has to by mortgage insurance to protect lender from buyer’s default, which increases the cost of mortgage. Here valuation of borrower’s property or asset is calculated by an appraiser, but there is no greater measure of the actual value of the property.

Lower Loan to Value(less than 80%) carries less risk from lender’s point of view. In the United States conforming loans have to meet Fannie Mae & Freddie Mac underwriting guidelines are limited to that Loan to value which is less than or equal to 80%.In case of extending loans where Loan to Value is more than 80% then its subject to private mortgage insurance. Individual mortgages are subject to combined Loan to Value criteria. But to assess the risk factors of the borrowers one should notice all outstanding mortgage debt as percentage of total appraised value of the property. The combined Loan To value is a finer way to measure the borrower’s riskiness. It is the proportion of loan (secured by property) in relation to its values. In the real estate business the using the selling or appraised value of a property the available or desired down payment is compared with desired mortgage amount the Loan to Value is calculated. Lender will provide mortgage accordingly. The type of property whether owner occupied or investment will determine the allowable Loan to Value. Thus as safeguard parameter for the lender Loan to Value method has immensely been helpful to lenders.