The loan-to-value (LTV) is a ratio that lenders use to assess the risk of a loan before approving financing for a borrower. It’s calculated by dividing the mortgage amount by the cost or value of the property purchased. For example, Joe borrows $75,000 of the total $100,000 purchase price of a home. The LTV here is 75%.
It essentially shows whether the amount of the mortgage could be recouped from the value of the property. The higher the ratio, the higher the risk for the lender. As an investor, you want to have a low LTV ratio as to minimize the cost of the loan relative to the property.
Why Does the LTV Ratio Matter?
It matters because it helps to measure whether money can easily be received back. From a lender’s point of view the more value the property has over the amount of the mortgage, the better chance of getting their money back if they need to take over the property and resell it to recoup the loan.
This is also important for an investor because if a home has a low LTV that means that the profit margin could be higher depending on how much other cash you are contributing out of pocket. If the appraised value of the property is much higher than the mortgage amount then you’re looking at a decent deal.
Also for investors, a lower LTV ratio can mean lower mortgage costs which means lower operating expenses and more potential profit. Lenders will give lower interest rates to loans with LTV ratios lower than 80% which can lead to big savings.
On the other hand, a higher LTV ratio could not only lead to a larger interest rate, but the lender could add on mortgage insurance which increases the monthly payment even further. While mortgage insurance may be taken off once the LTV ratio is paid down to 80%, it will still cost more until then.
Finding Deals with Lower LTV
Finding a deal with a lower LTV can be easier said than done. Deal with a high value and low amount to finance are not always readily available. However, there are other options for investors that want something with a low LTV such as crowdfunding real estate. Patch of Land offers real estate crowdfunding services and helps you turn the tables a bit. Instead of putting up the down payment and hoping that a lender will give you the rest, Patch of Land allows you to put up a small investment (minimum $5,000) to fund someone else’s project. Now remember what we discussed above about LTV? Patch of Land has an average 65.04% day 1 LTV.
Want to learn more and get started investing? Head to Patch of Land to see the current available investments right now.