DEFINITION of Maximum Loan-to-Value Ratio
The maximum loan-to-value ratio is the largest allowable ratio of a loan's size to the dollar value of the property. The higher the loan to value ratio, the bigger the portion of the purchase price that was financed. Since the home is collateral for the loan, the loan-to-value ratio is a measure of risk used by lenders. Different loan programs are viewed to have different risk factors, and therefore, have different maximum loan-to-value ratios.
BREAKING DOWN Maximum Loan-to-Value Ratio
Some home loan programs allow for a high maximum loan-to-value ratio, and are designed specifically for low to moderate income and first-time home buyers. Many of these programs are sponsored by state and local governments, the Federal Housing Authority, and the Veterans Administration. It is wise for a borrower to investigate these options before selecting any one lender's high loan-to-value program.
The mortgage loan, along with the down payment, is used to buy the property. The property serves as collateral for the loan. In the event the purchaser can no longer make the loan payments, the lender takes possession of the property. The lender can sell the property and use the proceeds to repay themselves the borrowed money. The lender places a maximum allowable amount on the loan vs. the property value. If the loan is too big a portion of the property value, the bank wouldn't be able to get their money back in the event of a borrower default.