Loan to value
From Wikipedia, the free encyclopedia
Loan to Value (LTV) is a mathematical calculation which expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. The resulting percentage is commonly referred to as the loan to value ratio. For instance, an appraised property value of $120,000 and a first mortgage of $90,000 produce an LTV ratio of 75%.
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 ratios of a loan increase the qualification guidelines for certain mortgage programs become much more strict.
The valuation of a property is typically determined by an appraiser, but there is no greater measure of the actual real value of any 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. 100% 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 a 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 Loan-to-Value Ratio displays your equity in the property, which is basically the amount of the property you own, expressed as a figure. One's equity can also be thought of as the amount of money one would receive if one sold their property as its valued price. Your Loan-to-Value Ratio is an important figure that you need to know when receiving or refinancing a loan.
This is how to figure out your loan-to-value ratio if you are in the process of receiving a loan.
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[edit] Receiving a Loan
1. First, start with the purchase price of the property. Example: $150,000 2. Then, subtract the amount of your downpayment. Example $20,000 3. Next, identify your loan amount, which is the purchase price minus the downpayment. Example: $150,000 - $20,000 = $130,000 4. Afer that, divide the loan amount by the purchase price. Example: $130,000 divided by $150,000 = 0.87 or 87%, which is your ratio. 5. Finally, you have your Loan-to-Value Ratio and this number would be used when referring to your loan. You would want a loan of 87% loan-to-value.
[edit] If you already have a loan
1. You will need to get an appraisal of your property. Once you own a home, this is the only way to get an accurate assessment of its value. If one is just doing for informational purposes, they can save the appraisal fee and simply estimate the value by comparing their property to similar homes in the neighborhood that have sold. This will be the value number for the equation. 2. Then, you eill need to look at your most recent loan statement to find what you still owe, this would be your balance too and the loan amount for the equation. 3. Finally, you will divide the loan figure by the value figure, this will get you your ratio.
[edit] 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.
