When applying for a loan, lenders assess risk using lending ratios—key metrics that compare how much you’re borrowing against the value of an asset or your income. These ratios guide lenders in deciding whether to approve your loan and under what conditions.
The most common lending ratios include:
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Loan-to-Value (LTV) Ratio: This compares your loan amount to the appraised value of the asset you’re purchasing, like a home or vehicle. For example, if you buy a $400,000 home with an $80,000 down payment and loan $320,000, your LTV is 80%. Generally, an LTV of 80% or less helps you avoid private mortgage insurance (PMI). For further details, see Loan-to-Value Ratio (LTV).
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Debt-to-Income (DTI) Ratio: This measures your total monthly debt payments against your gross monthly income, reflecting your ability to manage new debt. A DTI of 43% or lower is usually preferred by lenders. Learn more at Debt-To-Income Ratio.
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Loan-to-Cost (LTC) Ratio: Primarily used in construction or development loans, LTC compares the loan amount to the total cost of a project, including purchase and construction expenses. A typical LTC is around 75%-80%. For more, visit Loan-to-Cost Ratio (LTC).
Why Lending Ratios Matter
Lending ratios help lenders evaluate risk by showing how much equity you have in an asset, or how your income stacks up against existing debts. Lower ratios signal less risk, which can lead to better loan terms, such as lower interest rates or waived insurance costs.
Improving Your Lending Ratios
- To improve LTV, increase your down payment to reduce the loan size relative to the asset’s value.
- To lower DTI, either reduce existing debt payments or increase your gross monthly income.
FAQ Highlights
- What if my LTV is too high? Typically, you’ll need to pay PMI or may face higher interest rates.
- Can I get a loan with a high DTI? Some loans allow higher DTI if other factors are strong, but approval is tougher.
- Which ratio is more important? Both LTV and DTI are essential; lenders consider both in their overall risk assessment.
For authoritative guidelines, see the Consumer Financial Protection Bureau’s resources on Debt-to-Income Ratio and authoritative mortgage info at IRS.gov.
This comprehensive approach helps borrowers understand lending ratios’ impact and how to navigate loan applications for better outcomes.
