Loan-to-value ratio

Loan-to-value ratio

The loan-to-value (LTV) ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%.(LTV)

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 in the foreclosure process 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 there is no greater measure of the actual real value of one property than 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." What constitutes recent varies by institution but is generally between 1–2 years.

Low LTV ratios (below 80%) 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 documentation. Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. The full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers.

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 subject to private mortgage insurance. For properties with more than one mortgage lien, such as stand-alone seconds and home equity lines of credit (HELOC), the individual mortgages are also subject to combined loan to value (CLTV) criteria. The LTV for the stand-alone seconds and HELOCs would simply be their respective loan balance as a percentage of the total appraised value of real property. However, in order to measure the riskiness of the borrower, one should look at all outstanding mortgage debt as a percentage of the total appraised value of real property (CLTV).

In Australia, the term Loan to Value Ratio is abbreviated to LVR instead of LTV. A LVR of 80% or below is considered to be a low risk for standard conforming loans, and below 60% for a no doc loan or low doc loan. Higher LVRs are available if the loan is mortgage insured.[1]

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 (November 2011) there are very few mortgages available with an LTV of over 90% - and 75% LTV mortgages are the most common.[2]


Combined Loan To Value: (CLTV) ratio

Combined Loan To Value (ratio) (CLTV) is the proportion of loans (secured by a property) 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


External links

Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • loan-to-value ratio — loan to value ( LTV) ratio The name used to refer to a credit analysis ratio that measures collateral coverage. To calculate the LTV ratio, the total amount of the borrower s obligations to the bank is divided by the total calculated value for… …   Financial and business terms

  • Loan-To-Value Ratio - LTV Ratio — A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the… …   Investment dictionary

  • loan-to-value ratio — (LTV)  The ratio of the amount of money borrowed to the fair market value of the asset against which the loan is secured …   American business jargon

  • loan to value ratio — relation between the amount of a property loan in comparison with the value of the property it was used to purchase …   English contemporary dictionary

  • Maximum Loan-to-Value Ratio — The maximum ratio of a loan’s size to the value of the property, which secures the loan. The loan to value ratio is a measure of risk used by lenders. Different loan programs are viewed to have different risk factors, and therefore, have… …   Investment dictionary

  • Combined Loan To Value Ratio - CLTV Ratio — A ratio used by lenders to determine the risk of default by prospective homebuyers when more than one loan is used. In general, lenders are willing to lend at CLTV ratios of 80% and above to borrowers with a high credit rating. For example, let s …   Investment dictionary

  • combined loan to value ratio — ( CLTV) A measure of collateral coverage provided by a consumer borrower s residence. The borrower s total senior and subordinated loan balances divided by the appraised value of the borrower s residence. American Banker Glossary …   Financial and business terms

  • Loan-to-value ratio — (LTV) отношение суммы кредита к рыночной (или оценочной) стоимости залога. Чем ниже этот коэффициент, тем больше вероятность того, что при обращении взыскания выручка от продажи залога покроет расходы кредитора по предоставленной ссуде …   Ипотека. Словарь терминов

  • loan-to-value ratio — The percentage of purchase price to be financed with a mortgage. Common ratios are 80 and 90 percent. A down payment covers the rest of the purchase price …   Black's law dictionary

  • loan-to-value ratio — The percentage of purchase price to be financed with a mortgage. Common ratios are 80 and 90 percent. A down payment covers the rest of the purchase price …   Black's law dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”