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Understanding Loan To Value for your Home Loan

When you take a loan from a bank or a housing finance company, its unlikely that the bank will offer you 100% of the value of the property. Rather, they offer you a loan for only part of the value of the property. In the current economic climate, this "loan to value" or LTV is around 85%, i.e., you have to find the 15% of the value of your purchase on your own. LTV is one assessment the lender makes in offering you a home loan.

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Here are 3 more points you must know about LTV?

Firstly, that the LTV depends upon the lender's valuation of your home, and not yours. This is especially important when you are buying a home in the resale market, for which there is no objective barometer of what the value of the home should be. So, for instance, you might be buying a house for Rs 60 lakhs, but the lender's surveyor's might value the house for underwriting purposes for only Rs 50 lakhs and will give you a loan for Rs 42.50 lakhs only, and you will have to find the balance of Rs 17.50 lakhs through other sources. Of course, it the transaction value is less than the lender's appraised value, you will get a loan on the transaction value.

Secondly, if the lender sees you as a high-risk borrower, i.e., they do not have full comfort in your ability to service the loan, they might reduce the LTV and demand that you pay a higher amount of the value of the house. For instance, instead of offering you the typical 85% loan to value, they might insist that their contribution can only be 70%, in which case you have to find the balance on your own.

Finally, if you want a high LTV and the lender agrees to give it to you, its likely that you will be expected to pay a higher rate of interest and as a result a higher loan EMI. You need to be comfortable that this is a burden you are willing to take upon yourself.

LTV is one way the lender is going to assess the risk of lending to you. Its not meant to comprehensive or the sole criteria. To improve your case, make sure you have all the necessary documents to support a higher LTV for the cheapest home loan rate.

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