3 Nov 2011
One of the most common terms you will hear when applying for a mortgage to either refinance or buy a home is “LTV.” LTV is simply shorthand for Loan-To-Value. All this means is the outstanding loan balance relative to the appraised value of the property.
For example, if you buy a $400,000 home and put 20% down, you have a mortgage of $320,000. Therefore, the LTV is 80%.
LTV is important because it is a major component of pricing and underwriting mortgages. The lower the LTV the better because it means the lender is taking on less risk in the event of a default.
There are other versions of LTV that you may hear as well such as “CLTV.” CLTV means Combined Loan To Value. CLTV is used when there is a second mortgage or home equity line behind a first mortgage. For example, if you refinanced and took out a home equity line of 10% of the appraised value in the situation mentioned above you would have a $320,000 first mortgage and a $40,000 second mortgage. Together these two mortgages add up to $360,000. Therefore, the CLTV is $360,000/$400,000 or 90%. CLTV also is considered when pricing and underwriting mortgages as well.
The last version of LTV is “HLTV” which stands for High Loan To Value. This is a play on the CLTV when a borrower may have an open or revolving line of credit on the home. In the CLTV example above, we are assuming the balance on the home equity line is the maximum. However, there are situations where the balance is lower than the credit line. HCLTV is how we calculate the maximum loan to value if we assume the credit line is maxed out.
For example, let’s say you have home equity line for $40,000, however, your only carry a balance of $20,000 on the credit line. The first mortgage is $320,000 and the value of the home is $400,000. Our LTV, CLTV, and HLTV would be as follows:
LTV is $320,000/$400,000 = 80%
CLTV is $320,000 + $20,000 = $340,000/$400,000, so 80% LTV & 85% CLTV.
HLTV is $320,000 + $40,000 = $360,000/$400,000, so 80% LTV, 85% CLTV, and 90% HLTV.
Many lenders are scrutinizing HLTV because even though a homeowner may not carry a balance on a second mortgage, the potential to have a balance on the credit line increases the risk to the lenders so they must take this into consideration.
As always, if you have any questions do not hesitate to shoot me an email or give me a call.