The Real Estate Loan to Value Ratio

After the recent mortgage crisis, it’s important to understand what makes a home a good bet for a banker. The real estate loan to value ratio is one of the most important factors for any bank or mortgage company. When you buy a new home, or refinance your existing home, this ratio is one of the first things the lender will look at.

Loan to Value

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How to Figure Loan to Value Ratio

In order to figure out this equation, take what is owed on the home and divide it by the market value. For example, if a home has a market value of $200,000, but the existing mortgage is $150,000, you simply divide 150,000/200,000.

In this case, the loan to value ratio is .75 or 75%. Some banks will grant a loan on a ratio of 80% or more, but as a rule, the lower the ratio, the more likely a banker will consider the loan.

How to Lower Your Loan to Value Ratio

Since the most likely reason that the LVR would matter is in the case of a refinance, here are a few things that you can do to improve the ratio on your home.

  • Never get behind on your mortgage
  • Pay more towards the principal on your existing loan
  • Make a large down payment on the loan

Most people refinance because they need to lower their existing mortgage. If you’ve owned your home for 10 years or more, and you’ve never gotten behind on the payments, then you’re in good shape. Hopefully, the market value on your property has continued to appreciate, too.

If at all possible, make extra mortgage payments when you can. This drops the loan value faster. Even if your LVR is high, there are still banks that will work with you, but all banks love a responsible home owner.