Loan to Value: Definitions in Mortgage Continued

Buying a new home or refinancing your existing mortgage is something that hopefully everyone will experience at one point in their life. Mortgages are tailored for the individual or couple that is buying the home. They are assessed by the overall risk the investor will have on the loan based on the qualifications of the consumer. Yesterday we discussed DTI or Debt to Income which is the borrowers ability to repay the debt. Today I would like to take a look at the collateral side of lending commonly referred to as LTV or Loan to Value.

Like DTI, Loan to Value is also expressed as a ratio. It is the amount you will finance for the purchase or refinance divided by the value of the home. The home is what is used as collateral and the greater the equity the lower the risk. Another way to put that would simply be low LTV lowers the risk and high LTV increases the risk.

Let’s look at an example for a refinance transaction. You currently owe approximately 150K on your home. An independent appraisal has determined that the value of your home is approximately 300K. The loan to value on your home would be:

loan amount / appraised value = LTV   150K / 300K = 1/2 = 50%.

We never would use the 1/2 in the example as the number is always expressed as a percentage however, for the example I wanted to illustrate the correct math. 50% LTV would be considered as a low risk loan to value. That means that you have 50% equity in the home and in the event the lender had to take back the property via Foreclosure they would be able to sell for a profit.

80% LTV is considered the break even point for an investor that has to foreclose on a property. They spend approximately 20% of the equity in fees, marketing and reduction of price as well as the holding costs if they are to retake the property. This is exactly why they need insurance know as Mortgage Insurance when our LTV exceeds 80%.

Let’s take a loook at another example. You are buying a home and you have 3.5% to put down as a down payment. The home that you would like to buy is selling for 100K. This means that you would need to finance 96, 500K of the purchase:

LTV = Loan Amount/Appraised Value = 96,500k / 100,000k = 96.5% LTV(please note that purchase price and appraised value can be different. In the event they differ on a purchase the investor will base LTV off the lower of the two.)

We have looked at a few basic examples of LTV here today. The last thing that I would like to dicuss briefly is CLTV. CLTV stands for combined loan to value. This is when you have two or three loans on a property. If you have a loan for 100K and a second mortgage for 50K and the value of the property is 300K how would you determine the combined loan to value? Let’s look at an example:

Loan 1 + Loan 2 / Appraised Value = CLTV; 100k + 50k / 300k = 150k / 300k = 50% CLTV.

These are very basic examples and I must tell you that there is always an LTV and sometimes a CLTV. You will have both in many cases:

Example above the LTV = 100k / 300k = 33% and the CLTV = 100k + 50k / 300k = 50%.

CLTV may also be referred to TLTV or HCLTV which are total loan to value and heloc combined loan to value.

I hope that you enjoyed this information on LTV. Stay tuned for definitions of credit and mortgage insurance coming soon.  As always thank you for listening.