What indicates a higher risk for lenders regarding the LTV ratio?

A higher loan-to-value (LTV) ratio indicates a greater risk for lenders because it reflects a greater proportion of the property’s value being financed through debt. When borrowers have a higher LTV ratio, it suggests that they are contributing less equity into the property. For example, an LTV ratio of 95% means the borrower is only putting down 5% as a down payment, which can be a concern for lenders.

This elevated risk arises because, in the event of a default, the lender has less to recover when selling the property. If the borrower defaults and the lender has to foreclose, the sale proceeds may not cover the outstanding loan balance, especially if market conditions change or property values decrease. Lenders typically prefer lower LTV ratios, as they signify a stronger borrower commitment through a larger down payment, reducing the lender's risk exposure. Therefore, when the LTV ratio is higher, it signals an increased likelihood that the borrower may struggle to meet repayment obligations, heightening the lender's overall risk.