If you are applying for a home loan, then you are likely to come across the term “Loan to Value Ratio” which is also called the LTV ratio. But what is it?
Simply put, the LTV ratio determines the amount of home loan you can get. This is because it’s the ratio of the loan amount and the property amount. So, if you want to buy a house that costs Rs. 40 lakhs and the bank has approved an LTV ratio of 80%, it means that you can get a loan of Rs. 32 lakhs (80% of Rs. 40 lakhs).
Significance of LTV Ratio
Believe it or not, the LTV ratio is as important as other factors like the home loan interest rate, processing fee, etc. This is because the lower is the ratio, the higher is the amount you have to pay as down payment. Consider an example in which you have to take a loan of Rs. 80 lakhs and the ratio is 70%. It means that you have to pay Rs. 24 lakhs out of your own pocket in the form of down payment which can be quite challenging.
LTV Ratio and Loan Amount
Although the banks have a good control over the LTV ratio that they can approve, there are certain limits they have to follow as well. The RBI guidelines require them to cap the ratio to 90% for loans up to Rs. 30 lakhs, 80% for loans ranging from Rs. 30 lakhs to Rs. 75 lakhs, and 75% for loans above Rs. 75 lakhs.
The banks calculate the ratio on the basis of the RBI limits and their own evaluations based on factors like the applicant’s age, income, credit report, etc.
How to Get a High Loan to Value Ratio?
With a high ratio, you can enjoy a lower financial burden through smaller down payment. The following are some of the factors that affect this ratio:
To enjoy a high Loan to Value ratio, the most important thing you need to do is show that you can be trusted with a high loan amount. For this, you must have a sufficiently high income to pay high EMIs and repay the full loan within the term the bank is comfortable with. If that’s not the case, then you can either arrange the money for a big down payment or get a cheaper house/apartment.
Your credit report tells a bank everything need to know to determine your Loan to Value ratio and whether they should approve the loan in the first place. This is because it contains your credit history, credit score, current debt, variety in credit (if any), etc.
One thing that your bank will sure look into is that whether you have a good repayment history i.e. whether you were punctual with your loan payments and credit cards bills in the past. If you were late only a few times, then it means you can be trusted with a high loan amount or rather a high LTV ratio. Similarly, the report will also show the bank your credit score which is another important factor that affects your ratio.
History with Bank
If you are an old customer and have a really old account, then it’s possible that your bank already knows a lot about you personally. They will know if you have been a loyal customer and paid your dues on time. This relationship alone can help you get a better ratio.
If you are already repaying a loan or two, then it means there is a huge monthly expense involved. By obtaining another loan, your financial burden will only increase. Thus, a bank might be unwilling to approve a high LTV ratio so that you have to pay a high amount as down payment, and with the principal amount lower, your EMIs will be lower too to pose a smaller challenge.
Granted, your credit report and income are important too but it’s the LTV ratio that determines your EMIs and the amount of money you have to arrange on your own for the down payment. Thus, choose a loan wisely.
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