Loan To Value Clearwater

The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.

The term is commonly used by banks and building societies to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property. For instance, if a someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%.

Loan to value is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect the lender from the buyer default, which increases the costs of the mortgage.

The valuation of a property is typically determined by an appraiser, but a better measure is an arms-length transaction between a willing buyer and a willing seller. Typically, banks will utilize the lesser of the appraised value and purchase price if the purchase is "recent" with in 1–2 years.

Low LTV ratios (below 80%) carry with them lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low credit scores, previous late payments in their mortgage history, high debt-to-income ratios, high loan amounts or cash-out requirements, insufficient reserves and/or no income. Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. Full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers.

In the United States, conforming loans that meet Fannie Mae and Freddie Mac underwriting guidelines are limited to an LTV ratio that is less than or equal to 80%. Conforming loans above 80% are allowed but must include private mortgage insurance. Properties with more than one lien, such as stand-alone seconds and home equity lines of credit (HELOC), are subject to combined loan to value (CLTV) criteria. The LTV for the stand-alone seconds and Home Equity Line of Credit would be the loan balance as a percentage of the appraised value. However, in order to measure the riskiness of the borrower, one should look at all outstanding mortgage debt.

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