The loan-to-value ratio is a financial term used by lenders to express the ratio of a
loan to the value of an asset purchased.
The term is commonly used by banks and building societies to represent the ratio of the first
mortgage lien as a percentage of the total appraised value of real property.
For instance, if someone borrows $130,000 to purchase a house worth $150,000, the LTV
ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%.
The remaining 13% represent the lender's haircut, adding up to 100% and being covered from the
borrower's equity.
The higher the LTV ratio, the riskier the loan is for a lender.
Loan to value is one of the key risk factors that lenders assess when qualifying borrowers
for a mortgage.
The risk of default is always at the forefront of lending decisions, and the likelihood of
a lender absorbing a loss increases as the amount of equity decreases.
Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage
programs become much more strict.
Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect
the lender from the buyer default, which increases the costs of the mortgage.
The valuation of a property is typically determined by an appraiser, but a better measure is an
arms-length transaction between a willing buyer and a willing seller.
Typically, banks will utilize the lesser of the appraised value and purchase price if
the purchase is "recent" with in 1–2 years.
Low LTV ratios carry with them lower rates for lower-risk borrowers and allow lenders
to consider higher-risk borrowers, such as those with low credit scores, previous late
payments in their mortgage history, high debt-to-income ratios, high loan amounts or cash-out requirements,
insufficient reserves and/or no income.
Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a
satisfactory mortgage history.
Full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers.
The loans with LTV ratios higher than 100% are called underwater mortgages.
In the United States, conforming loans that meet Fannie Mae and Freddie Mac underwriting
guidelines are limited to an LTV ratio that is less than or equal to 80%.
Conforming loans above 80% are allowed but typically require private mortgage insurance.
Other over-80% LTV loan options exist as well.
The Federal Housing Administration insures purchase loans to 96.5%, TD Bank, Toronto-Dominion
Bank's U.S. unit, which on Friday April 18th 2014 began accepting down payments as low
as 3% through an initiative called "Right Step," geared toward first-time buyers and
low- and moderate-income buyers, and the United States Department of Veterans Affairs and
United States Department of Agriculture guarantee purchase loans to 100%.
Properties with more than one lien, such as stand-alone seconds and home equity lines
of credit, are subject to combined loan to value criteria.
The LTV for the stand-alone seconds and Home Equity Line of Credit would be the loan balance
as a percentage of the appraised value.
However, in order to measure the riskiness of the borrower, one should look at all outstanding
mortgage debt.
In Australia, the term Loan to Value Ratio is used.
An LVR of 80% or below is considered to be low risk for standard conforming loans, and
60% and below for a no doc loan or low doc loan.
Higher LVRs of up to 95% are available if the loan is mortgage insured.
In the UK, mortgages with an LTV of up to 125% were quite common in the run-up to the
national / global economic problems, but today there are very few mortgages available with
an LTV of over 90% - and 75% LTV mortgages are the most common.
Combined Loan To Value: ratio Combined Loan To Value is the proportion of
loans in relation to its value.
The term "Combined Loan To Value" adds additional specificity to the basic Loan to Value which
simply indicates the ratio between one primary loan and the property value.
When "Combined" is added, it indicates that additional loans on the property have been
considered in the calculation of the percentage ratio.
The aggregate principal balance(s) of all mortgages on a property divided by its appraised
value or Purchase Price, whichever is less.
Distinguishing CLTV from LTV serves to identify loan scenarios that involve more than one
mortgage.
For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV
of 50%.
A similar property with a value of $100,000 with a first mortgage of $50,000 and a second
mortgage of $25,000 has an aggregate mortgage balance of $75,000.
The CLTV is 75%.
Combined Loan to Value is an amount in addition to the Loan to Value, which simply represents
the first position mortgage or loan as a percentage of the property's value.
See also Collateral
Cross-collateralization Haircut
Mortgage law Mortgage loan
References http:online.wsj.comarticles/SB10001424052702304626304579509463522046346?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj
External
links Investopedia.com page on loan to value
Link to an online loan to value calculator