Let\u00e2\u20ac\u2122s say an investor is looking at a loan of $420,000 on a property worth $600,000.<\/p>\n
Loan-to-Value = (420,000 \u00c3\u00b7 600,000) \u00c3\u2014 100 = 70%<\/p>\n
That means there is a 30% equity buffer.<\/p>\n
If the borrower defaults and the property needs to be sold, the lender has room to cover sales costs, legal fees, and time delays before risking capital.<\/p>\n
This is why many private investors consider a 70% loan-to-value to be the upper end of the \u00e2\u20ac\u0153comfortable\u00e2\u20ac\u009d range.<\/p>\n
Now let\u00e2\u20ac\u2122s take the same loan with a higher valuation error. If the real value of the property is actually $550,000, the true ratio becomes:<\/p>\n
420,000 \u00c3\u00b7 550,000 = 76%<\/p>\n
The equity buffer drops from 30% to 24%, and the lender is now exposed to more risk without even changing the loan amount. This simple example shows how important it is to verify value before relying on the ratio.<\/p>\n<\/div>