Question:

Loan-to-Value Ratio Definition

Answer:

Loan-to-value ratio (LTV) is the relationship expressed in percentage between the loan amount and the value of the property. For example, if a borrower takes a $160,000 loan to purchase a house worth $200,000 and puts $40,000 in down payment, the loan-to-value ratio of the transaction is 80% - 160,000 / 200,000.

The loan-to-value ratio is the decisive factor for paying PMI - private mortgage insurance. With LTV higher than 80%, borrowers will have to pay private mortgage insurance as required by lenders.

The good news is that when the loan-to-value ratio decreases to 78%, lenders are required to cancel PMI. At loan-to-value ratio of 80% a borrower may request in written form that PMI be cancelled.

The loan-to-value ratio is an important element of the loan application as lenders prefer to fund loans with low LTV. When loan-to-value ratio is small, the loan is considered lower risk and is easier to qualify.

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