What is the 'Loan-To-Value Ratio - LTV Ratio'

The loan-to-value ratio (LTV ratio) is a lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is approved, the loan generally costs the borrower more to borrow. Additionally, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender.Loan To Value Ratio (LTV Ratio)

BREAKING DOWN 'Loan-To-Value Ratio - LTV Ratio'

The LTV ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage. For example, a borrower taking on a $92,500 mortgage to purchase a home appraised at $100,000 would have an LTV ratio of 92.50% (92,500/100,000).

The loan-to-value ratio is a critical component of mortgage underwriting, whether it be for the purpose of purchasing a residential property, refinancing a current mortgage into a new loan, or borrowing against accumulated equity within a property.

 

All lenders assess the LTV ratio in an effort to determine the level of exposed risk they take on when underwriting a mortgage, calculated as the delta between the property's appraised value and the total amount borrowed. When borrowers request a loan for an amount that is at or near the appraised value, and therefore a higher loan-to-value ratio, lenders perceive that there is a greater chance of the loan going into default because there is little to no equity built up within the property. Should foreclosure take place, the lender may find it difficult to sell the home for an amount sufficient to cover the outstanding mortgage balance and make a profit from the transaction.

High LTV Ratio Implications

While the loan-to-value ratio is not the only determining factor in securing a mortgage or home equity loan or line of credit, the metric does play a substantial role in how much borrowing costs the homeowner. The majority of lenders offer mortgage and home equity applicants the lowest possible interest rate when the loan-to-value ratio is at or below 80%. A higher LTV ratio does not exclude borrowers from being approved for a mortgage, although the total cost of the loan rises as the LTV ratio increases. For instance, a borrower with an LTV ratio of 95% may be approved for a new mortgage, but the interest rate may be up to a full percentage point higher than a borrower with an LTV ratio of 75%. In addition to the higher interest rate, lenders may tack on a mortgage insurance requirement for high LTV ratio transactions. Mortgage insurance has the potential to substantially raise a borrower's monthly mortgage payment, and coverage may be required until the loan-to-value ratio reaches 80%.

RELATED TERMS
  1. 125% Loan

    A loan, usually a mortgage, with an initial loan amount equal ...
  2. Combined Loan To Value Ratio - ...

    A ratio used by lenders to determine the risk of default by prospective ...
  3. First Mortgage

    A mortgage in a first lien position on the property that secures ...
  4. Piggyback Mortgage

    A type of mortgage where a second mortgage or home equity loan ...
  5. Appraised Value

    An evaluation of a property's value based on a given point in ...
  6. Qualifying Ratios

    A set of ratios that are used by lenders to approve borrowers ...
Related Articles
  1. Personal Finance

    Conquering The Terms Of Your Mortgage

    Buyers with big down payments should get the best mortgage terms. Unfortunately, the equation isn't that simple.
  2. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  3. Insurance

    How to Outsmart Private Mortgage Insurance

    It's possible to use a second mortgage to avoid this fee, but is it in your best interest?
  4. Personal Finance

    Easiest and Hardest Cities for Getting a Mortgage

    Since the housing market crash of 2007, tight credit has made it harder to finance a home. Here are the 5 easiest and hardest cities for getting a mortgage.
  5. Personal Finance

    It Pays to Be a ‘HENRY’

    Why? Because being a “High Earner Not Rich Yet” may help you buy the house of your dreams with a lower down payment.
  6. Retirement

    When Are Mortgage Lenders Better Than Banks?

    Individuals seeking a mortgage loan should consider factors or circumstances that may make a mortgage lender a better choice than a traditional bank.
  7. Investing

    Private Mortgage Insurance - PMI

    A policy required by lenders for borrowers who are putting down less than 20% for a home mortgage. PMI usually requires an initial premium payment and possibly an additional monthly fee depending ...
  8. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  9. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
RELATED FAQS
  1. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
  2. What industries use the loan to value ratio?

    Find out more about the loan-to-value ratio, what the ratio measures and what industries the loan-to-value ratio is most ... Read Answer >>
  3. How do I calculate how much home equity I have?

    Find out how to calculate the home equity in your home, your home equity percentage and the loan-to-value, or LTV, based ... Read Answer >>
  4. What price-to-book ratio is considered average in the chemicals sector?

    Learn more about the loan-to-value ratio, what the ratio measures and how to calculate the loan-to-value ratio on Microsoft ... Read Answer >>
Trading Center