Question

What is a loan-to-value ratio? How is it used?

Answer 1

Loan-to-value ratio is an measure of risk estimation that lenders use in mortgage lending.
The ratio is used to determine the amount required for down payment by the borrower. It also determines as to whether a lender will extend credit or not to a borrower.
High value of Loan-to-value ratio represents high risk and vice versa.

The formula to calculate the loan-to-value ratio is:
Loan-to-value ratio=(Mortgage amount)/(Appraised value of the property)

Higher value of the ratio represents that the mortgage amount is higher than the appraised value of the property. In this case, the lender is exposed to higher default risk.
In some cases, mortgage loans are approved even though the value of the ratio is higher but the approval is done at higher interest rates. In addition, the borrower will be required to buy mortgage insurance when mortgage loans are approved at higher loan-to-value ratio.