Loan to value ratio (LTV) is the relationship between a property value and the amount of loans against it. LTV is calculated by dividing the loan amount by the property value.
If a home buyer makes a down payment of $40,000 on a home appraised at $200,000, the mortgage loan would be for $160,000. The LTV would be calculated by dividing the loan amount ($160,000) by the appraised value ($200,000) multiplied by 100. That makes the LTV ratio 80 percent. The bigger your down payment and the more home equity you have, the lower the LTV ratio.
LTV is one of the more important factors mortgage lenders consider when evaluating a home loan application. Loans with low LTVs are considered much safer than those with high LTVs. That’s because if the borrower defaults and the property must be foreclosed and sold to repay the loan, the lender has a much better chance of recouping what’s owed when the property is worth much more than the loan balance.
Some lenders have offered what is called a high-LTV loan, which lets you borrow more than your home is worth. Most high-LTV loans are worth 125 percent of equity. High-LTV loans are categorized as home equity loans, but the amount above your equity is actually unsecured credit, which means that it is not guaranteed. High-LTV loans are considered high risk and may not be available during poor mortgage or real estate market conditions.
Low LTV ratios (below 80%) usually enable lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low FICO credit scores, large loan amounts, history of previous late payments, high debt-to-income ratios, cash-out requirements, insufficient reserves 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 and may not be available at all during poor market conditions.
A related term is Combined Loan to Value ratio (CLTV) which considers all loans on the property. LTV only considers the primary loan but CLTV would include any additional loans such as a Home Equity loan or Home Equity Line of Credit (HELOC). So if you have an additional loan your CLTV would be higher than your LTV and would be considered a higher risk.
An example of CLTV is if a borrower has a $60,000 first mortgage and a $30,000 home equity loan against his house, and the property is worth $100,000, then his LTV for the first mortgage is 60 percent ($60,000 / $100,000) and his CLTV is 90 percent ($60,000 + $30,000)/$100,000.