Loan to value
Encyclopedia
The loan-to-value 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 ratio
s, 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 loan
s 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.
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.
of loan
s (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.
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
as a percentage of the total appraised
Real estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
value of real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
. 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
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
factors that lenders assess when qualifying borrowers for a mortgage. The risk of default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss in the foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
process increases as the amount of equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
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
Mortgage insurance
Mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer...
to protect the lender from the buyer default, which increases the costs of the mortgage.
The valuation
Real estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
of a property is typically determined by an appraiser
Appraiser
An appraiser , is one who sets a value upon property, real or personal. In England the business of an appraiser is usually combined with that of an auctioneer, while the word itself has a similar meaning to that of "valuer." In the United States, the most common usage relates to real estate...
, but there is no greater measure of the actual real value of one property than an arms-length transaction
Arm's length principle
The arm's length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-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
Credit score (United States)
A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts....
, previous late payments in their mortgage history, high debt-to-income ratio
Debt-to-income ratio
A debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the...
s, 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 loan
Conforming loan
In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.In general, any loan which does not meet guidelines is a non-conforming loan...
s that meet Fannie Mae and Freddie Mac underwriting
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
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
Second mortgage
A second mortgage typically refers to a secured loan that is subordinate to another loan against the same property.In real estate, a property can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position...
and home equity lines of credit (HELOC
HELOC
A home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period , where the collateral is the borrower's equity in his/her house...
), 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
No doc loan
A No-Doc or Low-doc loan refers to a finance product commonly offered by a mortgage lender to consumers who cannot qualify for normal loan products or do not wish to give up their financial privacy...
or low doc loan. Higher LVRs 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 (November 2011) there are very few mortgages available with an LTV of over 90% - and 75% LTV mortgages are the most common.
Combined Loan To Value: (CLTV) ratio
Combined Loan To Value (ratio) (CLTV) is the proportionProportionality (mathematics)
In mathematics, two variable quantities are proportional if one of them is always the product of the other and a constant quantity, called the coefficient of proportionality or proportionality constant. In other words, are proportional if the ratio \tfrac yx is constant. We also say that one...
of loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s (secured by a property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
) in relation to its value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
.
The term "Combined Loan To Value" adds additional specificity to the basic Loan to Value which simply indicates the ratio
Ratio
In mathematics, a ratio is a relationship between two numbers of the same kind , usually expressed as "a to b" or a:b, sometimes expressed arithmetically as a dimensionless quotient of the two which explicitly indicates how many times the first number contains the second In mathematics, a ratio is...
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
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
ratio.
The aggregate principal balance(s)
Principal balance
Principal balance, in regards to a mortgage or other debt instrument, is the amount due and owing to satisfy the payoff of the underlying obligation....
of all mortgages on a property divided by its appraised value
Appraised value
An appraised value or mortgage valuation pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer...
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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
or loan as a percentage of the property's value.
See also
- Collateral (finance)Collateral (finance)In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
- Cross-collateralizationCross-collateralizationCross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans...
- Haircut (finance)Haircut (finance)In finance, a haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset...
- Mortgage law
- Mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...