Loan to Value-A Safeguard of The Lender

In case of any lending concern there is always an underlying risk of default, so there is a very useful tool in this regard termed in financial market as Loan to Value. so the declared assets of the borrower has to play a great role in this situation

A lender has to be sure that in case of default the available assets could be sold & the loan amount recouped. In case of a mortgage agreement if the Loan to Value is quite high that is more than 80% then the lender secures repayment by making the borrower buy mortgage insurance. In real estate business too this Loan to Value is a very useful tool. It is actually a lending risk assessment ratio that financial institutions & lenders asses before approving a mortgage. Basically Loan to Value is the ratio of value of assets to loan value. Higher Loan to Value always attract greater risk from the lender’s point of view, actually the ratio is calculated as mortgage value is divided by the appraised value of the property ,multiplying it by 100 give anyone the Loan to Value measure for correctly assessing the risk. Again a more comprehensive assessing tool is combined Loan to Value when than one loan been used Here the calculation is loan1 plus loan2 to value of property.

The appraised value of a house is quite important in an underwriting process. It is carried out by a professional appraiser to arrive at correct Loan to Value ratio for the benefit of the lender. If the ratio is less than 80% then private mortgage insurance payments won’t be necessary. The closing cost has to be kept in mind in this regard because a closing cost which is the cost incurred by the lender & borrower over & above the value of the property, which has been incurred to complete real estate transaction & it is related to Loan to Value. These costs include origination fees, discount points, appraisal fees, title search, taxes, deed recording fees etc. So the lending concerns including the institutions heavily rely on this financial ratio for risk assessment, called Loan to Value