How Loan-To-Value Ratio Affects the Cost of a Mortgage

Loan-To-Value Ratio is a lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. 

Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.

Calculated as: Mortgage amount divided by the Appraised Value

For example, Jim needs to borrow $92,500 to purchase a $100,000 property. The LTV ratio yields a value of about 92.5%. Since bankers usually require a ratio at a maximum of 75% for a mortgage to be approved, it may prove difficult for Jim to get a mortgage.

Similar to other lending risk assessment ratios, the LTV ratio is not comprehensive enough to be used as the only criteria in assessing mortgages.

Income Property for Investors

Income property is property bought or developed to earn income through renting, leasing or price appreciation. 

Income property can be residential or commercial. Residential income property is commonly referred to as "non-owner occupied". A mortgage for a "non-owner occupied" property may carry a higher interest rate than an "owner occupied" mortgage as it is viewed by lenders as a higher risk.

A common practice during periods of home price appreciation is for investors and speculators to purchase residential income properties with the intent that rents will cover their monthly expenses for a period of time until the property can be sold for a large capital gain. As with all markets during times of fast price appreciation, and as with all market bubbles, those that enter the market first and get out first usually do well. Those that enter the market later, and get out last usually don't do as well.

Carlisle Mitchell - Realty Investor - Income Property

Debt-to-Income Ratio

Debt-to-Income Ratio
The percentage of a buyer's gross monthly income (what he earns before tax deductions) that goes towards paying off debt.

Debts can include car payments, credit card bills, child support payments and student loans.

Conventional loans will allow for up to 45% DTI and FHA loans will allow for up to 42% DTI. The lower a borrower's DTI, the better qualified she is to get a mortgage loan.