Loan to Value Ratios in Lending – Smart Investments
There are certain risks that are assessed before a person or entity is given the chance to borrow money. Some of these assessments include analyzing the person or entity’s loan to value ratio in lending. Overlooking this important detail does not make for a smart investment. Many home buyers who are purchasing a house are offered a certain amount of money as a loan according to the value of the home they are purchasing. If a home was to cost $100,000 to purchase, but the home was to appraise at $75,000, the loan amount cannot usually exceed the value of the home.
Many mortgage companies only offer 75% loan to value ratios in lending. This means that if a house were appraised at $100,000, the amount of money borrowed to purchase the home cannot exceed $75,000. This is to protect the financial investment that is being made. There are many loans that have been defaulted due to the high loan to value ratio in lending. It is smart to have a higher ratio when lending to high risk borrowers in order to allow for them to be approved for the loan that will purchase the house only if they can afford a higher down payment.
The qualification process for any property including residential or commercial real estate typically includes a certain loan to value ratios in lending. This is in place to protect the investor as well as to protect the borrower from making a bad purchase they cannot afford. Many people who have bad credit are given high loan to value ratios in lending. People who have good credit are given low ratios. This comes down to the risk involved in lending to a person who has a proven bad track record versus someone who has a proven good track record financially.
There is a higher risk that default will occur on a person who has bad credit than with a person who has good credit. This is the main reason that investors protect their assets by choosing to offer a strict regulation of a high loan to value ratios in lending for those who have bad credit. The higher the risk that person has to default, the less money they will be able to borrow. If a person or entity has a low risk of default, they will be able to borrow a higher amount of money when purchasing a property.