The loan-to-value (LTV) ratio is a financial term used by

lenders A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

to express the ratio of a loan to the value of an asset purchased. In

Real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

, the term is commonly used by

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

s and

building societies A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially savings and mortgage lending. Building societies exist in the United Kingd ...

to represent the ratio of the first

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...

line Line most often refers to: * Line (geometry), object with zero thickness and curvature that stretches to infinity * Telephone line, a single-user circuit on a telephone communication system Line, lines, The Line, or LINE may also refer to: Arts ...

as a percentage of the total appraised value of

real property In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, is land which is the property of some person and all structures (also called improvements or fixtures) integrated with or affixe ...

. For instance, if someone borrows to purchase a house worth , the LTV ratio is or , or 87%. The remaining 13% represent the lender's

haircut A hairstyle, hairdo, haircut or coiffure refers to the styling of hair, usually on the human scalp. Sometimes, this could also mean an editing of facial or body hair. The fashioning of hair can be considered an aspect of personal grooming ...

, 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. The valuation of a property is typically determined by an

appraiser An appraiser (from Latin ''appretiare'', "to value"), is a person that develops an opinion of the market value or other value of a product, most notably real estate. The current definition of "appraiser" according to the Uniform Standards of Prof ...

, 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" (within 1–2 years).

Risk

Loan to value is one of the key

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...

factors that

assess when qualifying

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

s 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 Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...

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 (also known as mortgage guarantee and home-loan insurance) is an insurance policy which compensates lenders or investors in mortgage-backed securities for losses due to the default of a mortgage loan. Mortgage insurance can be ...

to protect the lender from the buyer's default, which increases the costs of the mortgage. Low LTV ratios (below 80%) may carry with them lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low

credit scores A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...

, previous late payments in their mortgage history, high

debt-to-income ratio In the consumer mortgage industry, debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include pri ...

s, high loan amounts or

cash-out Cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing liens, and related expenses. Definition Strictly spe ...

requirements, insufficient reserves and/or no income. However, an LTV higher than 80% may carry Mortgage Insurance requirements, which will in turn offered the borrower a lower interest rate. 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.

Combined loan to value ratio (HTV PSV)

Combined loan to value ratio (CLTV) is the

proportion Proportionality, proportion or proportional may refer to: Mathematics * Proportionality (mathematics), the property of two variables being in a multiplicative relation to a constant * Ratio, of one quantity to another, especially of a part compare ...

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

s (secured by a

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

) in relation to its

value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...

. The term "''combined'' loan to value" adds additional specificity to the basic loan to value which simply indicates the

ratio In mathematics, a ratio shows how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ...

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 In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction of 100. It is often denoted using the percent sign, "%", although the abbreviations "pct.", "pct" and sometimes "pc" are also us ...

ratio. The aggregate principal balance(s) of all mortgages on a property divided by its

appraised value An appraised value (United States) or mortgage valuation (Australia) pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related t ...

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 with a single mortgage of has an LTV of 50%. A similar property with a value of with a first mortgage of and a second mortgage of has an aggregate mortgage balance of . The CLTV is 75%. Combined loan to value is an amount in addition to the Loan to Value, which simply represents the first position

or loan as a percentage of the property's value.

Countries

United States

In the United States,

conforming loan In the United States, a conforming loan is a mortgage loan that both meets the underwriting guidelines of Fannie Mae and Freddie Mac (the ''Enterprises'' or GSE) and that does not exceed the conforming loan limit. The most well-known guideline is ...

s that meet

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...

and

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...

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 Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses ...

. Other over-80% LTV loan options exist as well. The

Federal Housing Administration The Federal Housing Administration (FHA), also known as the Office of Housing within the Department of Housing and Urban Development (HUD), is a United States government agency founded by President Franklin Delano Roosevelt, created in part ...

(FHA) insures purchase loans to 96.5% and the

United States Department of Veterans Affairs The United States Department of Veterans Affairs (VA) is a Cabinet-level executive branch department of the federal government charged with providing life-long healthcare services to eligible military veterans at the 170 VA medical centers a ...

and

United States Department of Agriculture The United States Department of Agriculture (USDA) is the United States federal executive departments, federal executive department responsible for developing and executing federal laws related to farming, forestry, rural economic development, ...

guarantee purchase loans to 100%. Properties with more than one lien, such as a

second The second (symbol: s) is the unit of time in the International System of Units (SI), historically defined as of a day – this factor derived from the division of the day first into 24 hours, then to 60 minutes and finally to 60 seconds ...

lien, are subject to combined loan to value (CLTV) criteria. The CLTV for a property valued at with a first mortgage and a home equity lines of credit (

HELOC A home equity line of credit, or HELOC ( /ˈhiːˌlɒk/ ''HEE-lok''), is a revolving type of secured loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's propert ...

) balance of would be the 60% ( + )/. 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.

Australia

In Australia, the term loan to value ratio (LVR) 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 A No-Doc or Low-doc loan (abbr: No/Low Documentation Loan) refers to loans that do not require borrowers to provide documentation of their income to lenders or do not require much documentation. It is a financial product commonly offered by a mortga ...

or low doc loan. Higher LVRs of up to 95% are available if the loan is mortgage insured. It's also possible to take out a home loan with a 100% LVR, where home buyers aren't required to save up for a deposit. However, due to its risky stance, there are strict requirements for those who wish to take out a 100% LVR home loan such as using a guarantor, also known as a Guarantor home loan.

New Zealand

In New Zealand, the

Reserve Bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

has introduced Loan-to-Value restrictions on the banks in order to slow the rapidly growing property market - particularly in Auckland. The LVR restrictions mean that banks are not permitted to make more than 10 percent of their residential mortgage lending to high-LVR (less than 20 percent deposit) owner-occupier borrowers and they must restrict their high-LVR (less than 40 percent deposit) lending to investors to no more than 5 percent of residential mortgage lending.

United Kingdom

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.

References

* https://www.wsj.com/articles/SB10001424052702304626304579509463522046346

External links

Investopedia.com page on loan to value
{{DEFAULTSORT:Loan To Value Credit Personal finance Financial ratios Loans