This is the sixth installment in an ongoing series on mortgage basics. On my mortgage website, I cover a host of topics on my frequently asked questions page. Since this is the most popular page on my site, I thought it might be a nice way to begin my blog. You can find the entire list of FAQs here: Arizona Mortgage Pro FAQs. I will continue this series covering one topic per post.
What is a loan-to-value ratio (LTV) and why is it important?
Loan-to-value refers to the amount of the loan being taken out divided by the home's value or purchase price, whichever is lower. For a basic example, a home that is being purchased and appraised for $100,000 with an $80,000 proposed mortgage would have an LTV of 80%.
You may also hear or see the term CLTV, which means combined loan-to-value. This means that a home has more than one current or proposed mortgage. All of the loans on the home are added together and the same formula is used as LTV.
As if that wasn't already complicated enough, there is one more term related to LTV, HLTV. This refers to high loan-to-value. HLTV comes in to play when someone has a home equity line of credit (HELOC) attached to their home, but the balance is currently lower than the limit. The reason this is figured is because, in theory, a borrower could borrow to the limit of their HELOC at any time. Lenders always want to know what a worst case scenario would be, so HLTV matters.
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