When real estate loans are being discussed, a key factor that is often brought up is the loan to value ratio. This simply means the ratio between the amount of the loan and the fair market value of the property. If the loan is $200,000 and the house is worth $500,000, then the loan to value ratio is 40%.
This ratio matters, because lenders like to have ample value in the property to protect their loan. As a rule, if the loan to value ratio is low, you should get a better deal on the loan, a lower interest rate and better terms. If the loan to value ratio is high, then it will be harder to get the loan and the terms you are likely to get will be less favorable.
Please note that the fair market value of a property is, to some degree, a matter of opinion, and more importantly subject to change over time. For most purposes, “fair market value” means what a willing buyer would pay a willing seller for that property, without pressure on either side. The most common way to determine fair market value is to obtain information on recent sales of comparable properties.
In California, real property values are subject to a boom-bust cycle. During most time periods, prices are either generally rising or generally falling, although there are always local variations on the price movements. Thus, you should always exercise caution when you are told a figure as being fair market value for a property. You should ask, first, if the figure is based on comparable sales figures, and, second, how recent the sales figures are. And remember, the price at which property is listed is not the same as the price at which it is sold.