The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In real estate, the term is commonly used by

bank A bank is a financial institution that accepts Deposit account, 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 m ...

s and

building societies A building society is a financial institution owned by its members as a mutual organization, which offers banking institution, banking and related financial services, especially savings and mortgage loan, mortgage lending. They exist in the Unit ...

to represent the ratio of the first

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions 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 t ...

line 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, refers to parcels of land and any associated structures which are the property of a person. For a structure (also called an Land i ...

. 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, 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 Profes ...

, 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 environ ...

factors that lenders 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 thi ...

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 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'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, 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. However, an LTV higher than 80% may carry Mortgage Insurance requirements, which will in turn offer 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

Combined loan to value ratio (CLTV) is the proportion of

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

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, re ...

) 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 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 () is a number or ratio expressed as a fraction (mathematics), fraction of 100. It is often Denotation, denoted using the ''percent sign'' (%), although the abbreviations ''pct.'', ''pct'', and sometimes ''pc'' are ...

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 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 loans 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 New ...

and

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.underwriting guidelines are limited to a loan-to-value ratio (LTV) 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 The Federal Housing Administration (FHA), also known as the Office of Housing within the Department of Housing and Urban Development (HUD), is a Independent agencies of the United States government, United States government agency founded by Pr ...

(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 lifelong healthcare services to eligible military veterans at the 170 VA medical centers an ...

and

United States Department of Agriculture The United States Department of Agriculture (USDA) is an executive department of the United States federal government that aims to meet the needs of commercial farming and livestock food production, promotes agricultural trade and producti ...

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

second The second (symbol: s) is a unit of time derived from the division of the day first into 24 hours, then to 60 minutes, and finally to 60 seconds each (24 × 60 × 60 = 86400). The current and formal definition in the International System of U ...

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) 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 the Australian financial context, the loan-to-value ratio (LVR) is a critical metric in the mortgage industry. Typically, an LVR of 80% or lower is deemed low risk for conforming loans, and 60% and below for a no doc loan or low doc loan. Unique to the Australian market is the availability of higher LVR loans, which can extend up to 95% with mortgage insurance and even 100% LVR loans under certain conditions. These 100% LVR loans, designed for buyers without a deposit, are contingent upon stringent requirements, including a guarantor, also known as a guarantor home loan. This flexibility in LVR reflects the market's capacity to cater to a diverse range of borrowing needs while balancing the inherent risks associated with high LVR lending. The structure of LVR in Australia, particularly for high LVR loans, showcases the evolving dynamics of real estate financing. The option of high LVR loans expands access to property ownership but also introduces increased risk for both lenders and borrowers. Managing these risks, especially in the context of 100% LVR loans, is critical to the Australian mortgage sector. It underscores the market's nuanced approach to promoting homeownership while maintaining financial stability, primarily through risk mitigation strategies like guarantor-backed loans.

New Zealand

In New Zealand, the Reserve Bank 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, the loan-to-value ratio (LTV) ranges typically range between 60% and 95% LTV, with fewer 95% mortgages available. In the run-up to the national / global economic problems mortgages with an LTV of up to 125% were quite common, but lenders stopped offering them in 2008.

References

External links

Mortgage Lenders ease Rules for Home Buyers in Hun
''

The Wall Street Journal ''The Wall Street Journal'' (''WSJ''), also referred to simply as the ''Journal,'' is an American newspaper based in New York City. The newspaper provides extensive coverage of news, especially business and finance. It operates on a subscriptio ...

'' {{DEFAULTSORT:Loan To Value Credit Personal finance Financial ratios Loans