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What Is Loan-To-Value Ratio?

by Pag-IBIG Financing Admin

A key concept in helping home buyers assess how much they can borrow to finance their real property investment is the Loan – To – Value Ratio.

The Loan–To–Value Ratio (LTV for brevity) is the amount of the borrower’s loan divided by the appraised value of the property.

LTV = (Loan Amount) / (Appraised Value)

To illustrate, assume that Mr. Delos Reyes purchased a new house by the countryside worth PhP 3,000,000. He plans to borrow Php 2,400,000 from a local bank to finance his real estate investment.

Applying the concept, we get a Loan–To–Value Ratio of 80% for Mr. Delos Reyes.

LTV = (2,400,000) / (3,000,000)
LTV = 80%

Take note that in this example, we are assuming that the selling price is also the appraised value. In reality, banks will conduct their own appraisal of the property. The resulting Appraised value is used instead of the selling price, to divide the loan amount to finally determine the LTV ratio.

Equity and Loan-To-Value

Actually, the LTV ratio is the reverse of a borrower’s equity. Therefore, in our set example, since Mr. Delos Reyes has an 80% LTV ratio; he has equity of 20%.

By equity, we mean “how much a borrower owns in the value of his / her real property investment.”

So in Mr. Delos Reyes’s case, he only owns 20% of the value of his investment and owes 80% of it.

From the lender’s viewpoint, the higher equity you have tied up on your property, the less risky you are as a borrower.

A high loan-to-value ration also means that a home buyer owes more than he owns in the value of his investment. Therefore, banks will see the home buyer’s loan as one that is risky.

Low Down, High Loan-To-Value

Pag-IBIG Fund is a leading company in the Philippines that offers lower down payment and a high loan-to-value ratio, as high as 97.0% is some cases.

Other financial institutions are offering the same. But you will be required to pay for a private mortgage insurance to lessen the impact of the risk that they are placing on you as a borrower.

Financial Leverage and Loan-To-Value Ratio

Financial Leverage means the use of borrowed money to finance a real estate investment. From an investor’s viewpoint, the higher the leverage, the better because of the following reasons:

  • Their risk is minimized
  • More Cash available for other investments

The Importance of Loan-To-Value Ratio

Financial institutions generally look for three vital factors when qualifying you for a loan. These are:

  1. credit score
  2. debt-to-income ratio
  3. loan-to-value ratio

These factors are the benchmarks that helps the banks determine the following:

  1. the amount of loan to give you
  2. the interest rate of the loan
  3. the loan term
  4. whether the borrower is required to pay for a private mortgage insurance

~~~

This article on Loan-To-Value ratio is written by Niel Kyro Jo.

Filed Under: Buying Tips, Housing Loans, Real Estate Finance Tagged With: Credit Score, Debt-To-Income, Equity, Financial Leverage, Housing Loan, Interest Rate, Leverage, Loan-To-Value, Private Mortgage Insurance

Reader Interactions

Comments

  1. antonio dalisay says

    July 9, 2010 at 12:01 pm

    To my concern.
    Sir,actually i am already member of p.o.p.and i got new house in cavite. my problem until now why did not given my documents papers house & lot, as per information from lauresia real state need to stamp of power of attorney, how many months if needed to stamp,so i can process the electrical meralco and mwss.i hope some person help me regarding this matter and i highly appreciate, God bless.

    • admin says

      July 14, 2010 at 3:17 am

      Antonio,

      You should get in touch with your real estate agent or the developer from where you bought the property.

  2. julieann macatangay says

    August 8, 2010 at 1:21 pm

    Gusto qo mkapag pagawa ng isang simple bhay, kya me ay mg loan ng finnancing loan s pag ibig.

  3. emmanuel eusebio says

    December 22, 2010 at 5:24 am

    sir/madam,i would to ask a verification about my housing loan,,we are still waiting for the approval,,i will leave the country next month.can you please expedite the approval please?..thank you for your kind consideration. mr,emmanuel verzosa eusebio

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