Loan-to-value ratios are more than just a financial metric. For mortgage lenders, it’s a key risk indicator that determines whether or not a loan is worth their time — or if they are at risk of losing time, money, and sleep.
Let's explore the ins and outs of a homebuyer’s loan-to-value ratio, as well as all calculations, lender values, and methods for avoiding risk.
A loan-to-value ratio (LTV ratio) is a financial term used to express the level of risk associated with a loan. It is usually expressed as a percentage of the home's value compared to the outstanding mortgage balance and can be used to assess potential value changes over time.
This ratio makes more sense in practice. Let's say you have considered lending $100,000 on a property worth $120,000. In this case, your LTV ratio would be 83.33%.
However, if you have given home buyers a $120,000 loan on a property worth $100,000, your LTV ratio would climb to 120%.
Let's explore this in greater detail.
There is a simple formula for calculating a note's loan-to-value ratio:
Current loan balance ÷ Current home value = Loan-to-value ratio
For example, you lend $200,000 to a borrower on a home worth $250,000 — an initial LTV of 80%. However, let's say that market fluctuations have dropped the value of the home to just $200,000, and your borrowers have been late on their mortgage payments multiple times with a remaining balance of $180,000. This means the LTV has now risen to 90%, which indicates a much higher risk factor.
You can always use a business calculator to determine LTVs with additional factors, including the loan amount, mortgage insurance, down payments, and more.
Mortgage loan lenders typically require borrowers to maintain a low LTV ratio. The higher the percentage, the higher your risk factors, and the more likely it will be for you to lose money in the process.
In a worst-case scenario, borrowers may default on their homes and eventually foreclose, leaving you to pick up the pieces. And if you are not in the first lien position on the borrower's record, you may not stand to receive any compensation at all.
The highest acceptable ratio for most mortgage lenders is 97%. If the LTV on your note is higher than this, you may face a much larger risk than you bargained for — potentially the borrower's foreclosure and loss of assets.
If you are managing a home mortgage loan and are concerned that your borrower's ratio is too high, you will have few strategies available to reduce your liabilities.
You may try encouraging them to refinance their loan to get a lower loan-to-value ratio, or you could foreclose on your property and sell it to repay the loan. However, these extreme measures should only be taken as a last resort.
The best and most efficient solution for both parties is to sell your mortgage note to a qualified buyer. With the professional team at We Buy Loans Fast, this process can be quick, simple, and tailored to the individual.
Here's how it works:
Owning a mortgage loan could be a reliable source of income — and yet a risky liability. If your managed mortgage loan is more of a hassle than a source of passive income, it may be time to move on to bigger and better things.
Our professional team at We Buy Loans Fast is standing by to help. With 20+ years of experience and 100,000+ notes purchased, we have everything you need to ensure a safe and effective sale. Get started with a free consultation at any time!
