Loan-to-Value Ratio (LTV)
|The Loan-to-Value ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property.|
|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 in the foreclosure process increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become 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. This is not the case with VA loans.
|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 documentation.|
Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. The full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers.
Combined Loan-To-Value Ratio (CLTV)This is the aggregate principal balance(s) of all mortgages on a property divided by its appraised value or Purchase Price, whichever is less.
|This ratio is used by lenders to determine the risk of default by prospective homebuyers when more than one loan is used. In general, lenders are willing to lend at CLTV ratios of 80% and above to borrowers with a high credit rating. Again, this is not the case with VA loans.|