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What's Loan-to-Value?

Unless an individual has been trained in accounting and the financial world there are many terms and references in the mortgage arena that are unheard of or people have very little understanding of. Such is the case with loan to value ratios, or LTV as they are sometimes referred to.

This ratio is just one of the many aspects taken into account when a financial institution makes the decision to accept or decline an applicant’s home mortgage proposal. A loan to value ratio is a mathematical equation used by lender’s to help determine the risk of allowing an applicant to borrow money for home buying purposes.

The calculation take into account the total amount of the applied for loan and the appraised value of the property in question. The resulting number is the loan to value ratio.  It is considered by the lenders to be a risk factor indicator.

Higher LTVs are in the high risk for default category and lenders may be more likely not to grant the mortgage loan. Issues like high debt to income figures, prior late payment histories, and no steady income are other factors that financial institutions look at.

Items like previous large loans and inadequate money savings are viewed as well. These factors, as well as a high LTV can make the way to a successful mortgage application difficult for the applicant.

When an applicant is fortunate enough to receive a low loan to value ratio things go much smoother. Low LTV ratios have many benefits. They come with lower interest rates, and allow lenders to consider higher risk buyers by off setting their default concerns.

The people who have low loan to value ratios tend to be those with pristine credit histories and low risk as far as debt to income equations are considered.

It would benefit any customer with a healthy credit rating to make sure it stays that way. While the LTV is only part of the total calculations considered, this assurance for the banking organizations will go a long way in helping the client secure their home mortgage loan.  There are few other pieces of information that may be beneficial to the home mortgage loan applicant.

Loans that conform to the Freddie Mac or Fannie Mae underwriting guidelines are required to have a loan to value ratio of that is less than or equal to eighty percent. Those loans that are higher than eighty percent are subject to needing private mortgage insurance or PMI.

Another issue that impacts and has basis in LTVs is mortgages that properties have a second mortgage secured or home equity loan or line of credit. These properties are a little different in how loan to value ratios are affected. They become subject to what is called a combined loan to value ratio or CLTV.

This only applies in situations where the property in question has more than one lien against it. It would not apply in the case of an original mortgage.

Banks, lenders, and financial institutions have many factors and equations that they use to determine how to operate their business. Everything from employment history, salary, and prior credit history are taken into consideration.

While protecting their investment, they actually help to protect their client’s as well by not allowing loans on property or homes that would put the client in danger of default. This protects their profit and possibly protects the consumer from losing their home or bankruptcy. The loan to value figure plays prominently in this decision making process.