Loan to Value Ratio
One risk-minimization guideline is the loan-to-value ratio. This ratio protects the lender by assuring the lender that the borrower has sufficient equity invested in the property to properly maintain the property and to make mortgage payments on time. The ratio also protects the lender by ensuring an ample margin between the property value and the loan amount, in case of foreclosure on the property. Maximum loan-to-value ratios vary according to the type of property and state and federal requirements. Higher ratios can be granted with private mortgage insurance (to be discussed later) or government loan insurance (FHA, VA). In general, the average loan-to-value ratios range from 65 to 80 percent. The loan-to-value ratio of an income property loan usually ranges from 65 to 75 percent, and that of a residential loan from 75 to 95 percent. The loan-to-value ratio of FHA and VA loans ranges from 97 to 100 percent.
