The loan-to-value ( LTV ) ratio is the financial term used by the lender to express the loan ratio to the value of an asset purchase. This term is commonly used by banks and building societies to represent the ratio of the first mortgage line as a percentage of the total assessed value of the real property. For example, if someone borrows $ 130,000 to buy a home for $ 150,000, the LTV ratio is $ 130,000 to $ 150,000 or $ 130,000/$ 150,000, or 87%. The remaining 13% represent the haircut of the lender, adding up to 100% and covered from the borrower's equity. The higher the LTV ratio, the more risky the loan is for the lender.
Property valuation is usually determined by an appraiser, but a better measure is a long-handed deal between a willing buyer and a willing seller. Typically, banks will use a lower than rated value and purchase price if the purchase is "new" (within 1-2 years).
Video Loan-to-value ratio
Risk
Loans against value is one of the major risk factors that a creditor judges when a borrower qualifies for a mortgage. Risk of default is always at the forefront of lending decisions, and the likelihood of lenders that absorb losses increases as the amount of equity decreases. Therefore, as the LTV ratio of loans increases, qualifying guidelines for certain mortgage programs become much more stringent. The lender may ask the borrower of a high LTV loan to buy mortgage insurance to protect the lender from default buyers, which increases the cost of the mortgage.
Low LTV ratios (below 80%) lead them to lower rates for low-risk borrowers and allow lenders to consider high-risk borrowers, such as those with low credit scores, previous late payments in their mortgage history, debt-to-income high ratio, high loan amount or cash requirements, insufficient reserves and/or no income. The higher LTV ratios are primarily reserved for borrowers with higher credit scores and satisfactory mortgage histories. Full financing, or 100% LTV, is reserved only for the most creditworthy borrowers. Loans with LTV ratios higher than 100% are called undersea mortgages.
Maps Loan-to-value ratio
Combined loan to value ratio (HTV PSV)
The combined loan with value ratio (CLTV) is the proportion of the loan (guaranteed by the property) in relation to its value. The term " combined loan to value" adds additional peculiarity to the base loan for a value that only shows the ratio between one primary loan and the value of the property. When "combined" is added, it indicates that an additional loan on the property has been considered in the calculation of the percentage ratio.
The aggregate principal balance (s) of all mortgages on property are divided by the assessed value or purchase price, whichever is less. Distinguishing CLTV from LTV serves to identify loan scenarios involving more than one mortgage. For example, a $ 100,000 property with a $ 50,000 single mortgage has a 50% LTV. A property similar to a $ 100,000 value with a first mortgage of $ 50,000 and a second mortgage of $ 25,000 has an aggregate mortgage balance of $ 75,000. CLTV is 75%.
The combined loan with value is the amount other than Loan to Value, which represents only the first position of the mortgage or the loan as a percentage of the value of the property.
Country
AS
In the United States, adjusting loans that meet underwriting guidelines Fannie Mae and Freddie Mac are limited to LTV ratios that are less than or equal to 80%. Obeying loans above 80% is allowed but usually requires personal mortgage insurance. Other LTV loan options above 80% also exist. The Federal Housing Administration (FHA) guaranteed a 96.5% purchase loan, TD Bank, the United States Toronto-Dominion unit, which on Friday 18 April 2014 began receiving advance payments as low as 3% through an initiative called "Right Steps," which directed against first and low-income buyers and middle and low-income buyers (97% LTV), and United States Department of Veterans Affairs and the US Department of Agriculture guarantee a 100% purchase loan.
Properties with more than one lien, such as stand-alone seconds and home equity line of credit (HELOC), are subject to the CLTV criteria. LTV for stand-alone seconds and Home Equity Line of Credit is the balance of the loan as a percentage of the assessed value. However, to gauge the borrower's riskiness, one should look at all outstanding mortgage debt.
Australia
In Australia, the term loan to value ratio (LVR) is used. An LVR of 80% or below is considered a low risk for a standard adjustment loan, and 60% and below for no document or document loan is low. LVR up to 95% higher is available if mortgage loans are insured.
New Zealand
In New Zealand, the Reserve Bank has introduced Loan-to-Value restrictions on banks to slow down the rapidly growing property market - particularly in Auckland. LVR restrictions mean that banks are not allowed to make more than 10 percent of their mortgage housing loans to high LVR owner-borrowing borrowers (less than 20 percent) and they should limit their high LVR (less than 40 percent deposit) lend to investors more than 5 percent of residential mortgage loans.
United Kingdom
In the UK, a 125% mortgage with LTV is quite common in the face of national/global economic problems, but today (November 2011) there is little mortgage available with LTV over 90% - and 75% of LTV mortgages are the most common.
See also
- Warranty (financial)
- Cross-collateralization
- Haircuts (finance)
- Mortgage law
- Mortgage loan
References
- https://www.wsj.com/articles/SB10001424052702304626304579509463522046346
External links
- Investopedia.com loan page for value
Source of the article : Wikipedia
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