What is Loan-to-Value (LTV)?

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Published: 04th June 2013
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If you have ever shopped for a home loan, you probably have heard the term LTV, which is an acronym for loan-to-value. LTV is a major consideration for mortgage lenders because it is directly related to the risk of loss if they give you a loan and you stop making the payments.

A higher loan-to-value is regarded as riskier for a lender than a low loan-to-value, therefore you can expect that lenders will typically have stricter lending requirements and less advantageous terms for higher loan-to-value mortgages.

What Exactly is Loan-to-Value?

Loan-to-value is the percentage of the value of the property that you're borrowing. For example, if the appraised value of the house is $300,000 and you're taking out a $150,000 mortgage loan, the loan-to-value would be 50%. If you are seeking a $100,000 mortgage and the property is valued at $125,000, then the loan-to-value would end up being 80%.

The difference between the value and the amount borrowed is the equity in the home.

Higher LTV Means More Risk

Higher LTV home loans are more risky for a lender because they enhance the likelihood the lender will take a loss if you stop making the payments and they are forced to foreclose. If you have limited equity, it will be more difficult for the mortgage company to sell the home quickly without incurring a loss on the loan.

On the other hand, if you have substantial equity, meaning the loan-to-value is very low, the mortgage lender could easily firesale the house and recoup the money they lent you. Because of this, lower loan-to-value mortgage loans are deemed safer for a lender and generally come with better loan terms.

LTVs less than 75% are considered pretty safe for a lender, so expect the most desirable loan terms at this level or below. If you owe more than 80%, its considerably more risky for the lender, so expect to be required to carry mortgage insurance (or PMI) to protect the lender against loss in the event you stop making payments.

Determining LTV

Because loan-to-value is determined partly by the value of the home, a bank will ordinarily expect you to obtain a professional appraisal when you apply for a mortgage. When the appraiser has established the value of the property, the loan-to-value is determined by simply dividing the loan amount by the property value and multiplying by 100 to obtain a percentage.

Related Loan-to-Value Verbiage

If you have a second mortgage, you could also hear a few additional loan-to-value acronyms:
  • CLTV, or combined loan-to-value. This is the total loan-to-value of your 1st mortgage and any other home loans attached to your house, such as a 2nd mortgage and or HELOC.

  • HCLTV, or home equity combined loan-to-value or high combined loan-to-value. Should you have a home equity line of credit, or HELOC, HCLTV is the total loan-to-value of all mortgages on the real estate in addition to the available credit limit of your HELOC.

Note that CLTV takes into account only the outstanding balances, but HCLTV accounts for total credit limits. If you owe less than your total available on a HELOC, your CLTV will be less than your HCLTV. If you owe the maximum amount you can borrow on the HELOC, your HCLTV and CLTV will be the same.

M. Robert

Have a high LTV loan? Be ready for mortgage insurance or PMI. Check out Definition of PMI to find out what PMI is, when it applies, and how you can get rid of it.

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