What do lenders assess to determine how much they can lend?

Lenders primarily assess the loan-to-value ratio (LTV) to determine how much they can lend, as it provides a clear metric of the risk involved in the mortgage. The LTV ratio is calculated by dividing the amount of the loan by the appraised value of the property. This ratio helps lenders understand what percentage of the property’s value they are financing, which is crucial in assessing potential risk and ensuring that the borrower has sufficient equity in the property. A lower LTV typically indicates a lower risk for lenders, as it shows that the borrower has made a larger down payment relative to the property value, thereby reducing the lender’s potential loss in the event of a default.

While a borrower’s credit score is significant in evaluating their creditworthiness and ability to repay the loan, and the type and location of the property can influence its marketability and value, the LTV ratio directly quantifies the lending risk in relation to the property value. Hence, assessing the LTV is a fundamental practice in mortgage underwriting, shaping how lenders approach their lending decisions.