Legal Definitions - loan ratio

The term Loan-to-Value Ratio (LTV) is a financial metric used by lenders to assess the risk associated with a loan. It represents the ratio of the loan amount to the appraised value of the asset being purchased or refinanced. A higher LTV indicates a greater risk for the lender, as the borrower has less equity in the asset. The term "loan ratio" is often used as a shorthand or informal reference to the Loan-to-Value Ratio.

Lenders use the LTV to determine how much money they are willing to lend, what interest rate to offer, and whether additional requirements, such as private mortgage insurance, are necessary. A lower LTV generally signifies a lower risk for the lender and can result in more favorable loan terms for the borrower.

Here are some examples illustrating the Loan-to-Value Ratio:

• Residential Mortgage Purchase: Imagine a couple buying their first home. The house is appraised at $350,000, and they secure a mortgage loan for $280,000. To calculate the LTV, the loan amount ($280,000) is divided by the appraised value ($350,000), resulting in an LTV of 0.80 or 80%. This means the loan covers 80% of the home's value, and the couple provided a 20% down payment. Lenders often prefer LTVs of 80% or less for conventional mortgages to mitigate risk.

• Commercial Property Refinance: A business owner wants to refinance their office building, which is currently appraised at $1,200,000. They still owe $700,000 on their existing mortgage but want to take out a new loan for $900,000 to consolidate debt and fund an expansion. The LTV for this new loan would be $900,000 divided by $1,200,000, which equals 0.75 or 75%. This 75% LTV indicates that the new loan amount represents three-quarters of the property's current market value, which is generally considered a moderate risk for a commercial lender.

• Vehicle Loan for a Fleet: A delivery company decides to purchase a new fleet of vans for $250,000. The bank offers them a loan of $200,000 to finance the purchase. In this scenario, the LTV is calculated by dividing the loan amount ($200,000) by the total value of the vehicles ($250,000), resulting in an LTV of 0.80 or 80%. This 80% LTV means the company is financing 80% of the fleet's value, and the bank assesses its risk based on this ratio, considering the vehicles as collateral.