What is the loan-to-value (LTV) ratio?
The loan-to-value (LTV) ratio is the amount of the loan compared to the value of the property. For example, if you’re purchasing a home for $500,000 and taking out a loan for $400,000, the LTV ratio would be 80% ($400,000 / $500,000).
Lenders use the LTV ratio to determine the level of risk involved in a loan. The higher the LTV ratio, the more risk for the lender. Lenders typically set a maximum LTV ratio to limit their risk exposure.
What is the maximum LTV ratio for a self-employed home loan?
The maximum LTV ratio for a self-employed home loan will vary based on the lender and your individual financial circumstances. However, most lenders will limit the LTV ratio to 80% for a self-employed home loan.
This means that if you’re purchasing a home for $500,000, you’ll need to make a down payment of at least $100,000 (20%) and take out a loan for no more than $400,000 (80% of the property value).
Keep in mind that the LTV ratio is just one factor that lenders consider when determining your eligibility for a home loan. Lenders will also look at your credit score, income, expenses, and other factors to determine your borrowing capacity.
Why do lenders limit the LTV ratio for self-employed individuals?
Lenders typically limit the LTV ratio for self-employed individuals to minimize their risk exposure. Self-employed individuals often have varying incomes and expenses, which can make it challenging to determine borrowing capacity. By limiting the LTV ratio, lenders can reduce the risk of default and ensure that borrowers can afford to make their monthly mortgage payments.