Loan-to-Value (LVT) is the number used by lenders to determine the total amount of risk associated with a secured loan. It is used to measure the relationship between the loan and the asset’s market value to secure the loan, like your vehicle or house.
For instance, if the loan is worth half the asset’s value, the LTV will be valued at 50%. If the LVT increases, the lender’s potential facing a loss by the borrower defaulting on the loan repayment also increases; in short, more risk is created.
The LVT can apply on any secured loan; it is very commonly seen in mortgages. LTV can be seen on many federal mortgage programs, and the limits are specified as a part of the qualifying criteria. If you want to know what is LTV ratio, you can read more about it here.
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Loan-to-Value (LTV) Explained
As mentioned while explaining what is LTV ratio, a high LTV ratio suggests a high lending risk. This is because the purchased property (like your house) is used as collateral in the mortgage. Hence, the ratio will compare the size of the requested loan to the collateral size being pledged.
Due to this, knowing what is LTV loan ratio serves as an essential role in mortgage underwriting. For instance, if the LTV percentage is below 80%, the chances of securing long term loans from traditional mortgage lenders are good.
If you have an LTV ratio above 80% and lower than 100%, you can still secure loans, provided that you have a strong credit history. However, the terms of the loan will include high-interest rates. Additionally, you may also have to purchase PMI (private mortgage insurance). For LTV ratios above 80%, the request for loans will likely get rejected.
LTV ratio is critical because the lender uses this ratio to determine the total risk of handing a loan while evaluating the loan opportunity. If the loan is approximately near the asset’s value, the ratio will turn up to be high.
In cases of high LTV ratio, lenders will charge more interest; this is because there is an increased risk of the borrower defaulting on the repayment. Suppose the lender will have to sell the asset to recover the interest and the principal amount in foreclosure or default cases on the part of the borrower. In that case, there is an increased chance that the sale proceeds might not be enough even to cover the principal loan balance and the subsequent interest.
A lower LTV ratio provides more assurance to the lender if the borrower ever defaults on the loan foreclosure.
How to Calculate LTV
To know what is LTV loan, you need to follow the steps mentioned below:
- Divide the loan amount by the asset’s value
- Multiply the result by 100, which will give you the percentage.
If you are buying a house that is appraised by $300,000 and the loan amount is $250,000, the LTV ratio will be ($300,000/$250,000) x 100; the answer is 83.3%.
In short, the LTV ratio is the part of the appraised value of the property that is not covered by the down payment. If you place 15% down on the loan that covers the rest of the buying price, the LTV comes up to 85%.
Federal housing regulators and lenders are concerned about the LTV ratio when the loan is being issued. However, you can also calculate the ratio at any point in time during the repayment period by merely dividing the owed loan amount by the property’s appraised value. You will notice that as you keep repaying the loans, this amount keeps decreasing; thus, your overall LTV ratio starts to lower down as well. Alternatively, if the value of your property increases, it will reduce the LTV ratio as well. However, if the value of your property drops, it will only push the LTV ratio higher.
If your LTV ratio is more than 100%, it is considered that the borrower is ‘underwater’ – this means that the value of the loan balance owed is more than the overall property of the market. Additionally, it is also possible that such loans come with high closing costs or early repayment period.
Nebeus Crypto LTV Ratio
Most crypto lending platforms enforce an LTV ratio of 50%. It means that the collateral needs 2x the borrowing amount. For instance, the value of a Bitcoin is $10,000 – if you want to borrow a sum of $20,000 in cash, you will have to keep four BTC as collateral. Once you have cleared paying back the loan, you will get your four BTC back.
What is LTV ratio at Nebeus? Nebeus offers its users an LTV ratio of 85%. Additionally, the company also offers loans on amounts as low as €60. Additionally, the process is also quite fast and does not involve any documents or paperwork. The loan gets converted from Euro to the user’s bank card currency automatically as well.