# loan-to-value ratio

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## Loan-to-value ratio (LTV)

The ratio of money borrowed on a property to the property's fair market value.

## Loan to Value Ratio

1. In mortgages, the ratio of the amount of a potential mortgage to the value of the property it is intended to finance, expressed as a percentage. It is used as a way to assess the risk of making a particular mortgage loan. A lower loan-to-value ratio is seen as a lower risk to the lender. Most mortgage lenders require a maximum loan-to-value ratio of 75%. That is, a borrower is usually expected to pay for 25% of the value of a property out-of-pocket.

2. More broadly, a ratio of the amount of a potential loan to the asset it is intended to finance. In addition to gauging the risk involved in making the loan, it tells the borrower whether or not the loan can be repaid if he/she sells the asset. This can be important if the borrower becomes unable make payments.

## loan-to-value (LTV) ratio

The relationship between the principal amount of a loan and the appraised value of the property serving as security. A loan of \$80,000 on a property appraised at \$100,000 is an 80 percent LTV.Residential mortgages with an LTV of 80 percent or less qualify for FHA insurance; if the ratio is higher, then borrowers may be required to obtain private mortgage insurance.Generally speaking, the higher the LTV, the higher the interest rate will be because the lender has assumed more risk.Those risks are as follows:(1) When there is little equity in the property, it has a low hostage value; the borrower is more likely to default and walk away from the property because the borrower has little to lose. (2) At foreclosure, the property may not bring a price sufficient to pay off the principal balance of the loan, much less the accrued interest and costs of foreclosure.

## Loan-to-Value Ratio (LTV)

The loan amount divided by the lesser of the selling price or the appraised value.

The LTV and down payment are different ways of expressing the same facts. See Down Payment/Down Payment and LTV.

References in periodicals archive ?
For privately insured mortgages, we estimated that losses are divided 50-50 between the insurer and the insuree if the loan-to-value ratio is 90 percent or less and 60-40 if the loan-to-value ratio is greater than 90 percent.
Among the possible explanations are state regulations limiting the ability of PMI companies to insure mortgages having loan-to-value ratios above 97 percent, the specialization of some mortgage lenders in FHA loans, and borrowers' preferences to finance their home purchases with government-backed loans.
Institutions' expected dollar losses are determined primarily by the distribution of loan-to-value ratios within their mortgage portfolios: Higher ratios are associated with higher mortgage default probabilities and loss severity rates.
To some extent, PMI companies compete directly with the FHA and the VA to insure mortgages that have high loan-to-value ratios.
Even while Fannie Mae and Freddie Mac are encouraged to promote lending to lower-income households, their charters may also create barriers to such lending by limiting the risk they may bear: The mortgages they purchase, unless they carry private mortgage insurance or some other form of credit enhancement (for example, recourse to the lender), must have loan-to-value ratios of 80 percent or less.
As with the FHA, the VA's portfolio included a high proportion of loans with high loan-to-value ratios, and these loans had higher default rates than conventional mortgages with similar LTVs, resulting in a relatively large market share.
Fannie Mae and Freddie Mac are required by their charters to purchase private mortgage insurance or one of two other seldom-used forms of credit enhancement on all loans with a loan-to-value ratio above 80%, Zimmerman said.
Borrowers also can request cancellation of the insurance when their loan-to-value ratios have been reduced by 20%.
And if the Boston experience is representative of that nationally, black and Hispanic applicants would fare worse than white applicants because they have higher obligation and loan-to-value ratios and weaker credit histories.
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