What is a loan-to-value ratio?

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What is a loan-to-value ratio?

The loan-to-value ratio, or LTV, is the loan amount expressed as a percent of either the purchase price or the appraised value of the property. It is an important factor considered by lenders before approving a mortgage.

Few lenders will lend the full value of a property unless they have guarantees such as those offered by the Veterans Administration (VA). Otherwise, the risks are just too high because if the borrower defaults in the early years of the loan, the lender is stuck with a bad loan.

This is why lenders prefer a down payment of 20 percent, with an 80 percent LTV. Buying private mortgage insurance, which insures the lender against default, can reduce the LTV to 90 or 95 percent, making it possible to have a down payment of 10 or 5 percent.

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