UNDERSTANDING LOAN TO VALUE RATIO AND ITS IMPORTANCE
The loan-to-value ratio of a home loan refers to the percentage of the asset's value, in this case, a property, that a bank or a financial institution will be able to lend to the prospective buyer. Therefore, before approving a home loan, the lender will first evaluate the loan-to-value ratio to ensure that they do not lend the potential buyer an amount higher than the property's actual price. The loan-to-value ratio is mandatory to calculate the minimum down payment that the property buyer has to pay when buying a property.
Lenders calculate the loan-to-value ratio for a home loan using the following formula:
Loan-To-Value Ratio (%) = (Amount Borrowed/Value of the Property) x 100
To break this down further, if a potential buyer was in the market to purchase a home worth Rs. 1 crore, a...