As it is with most industries, the mortgage business has terminology used exclusively within the world of home loans. When securing a mortgage, especially for the first time, you may find your head buzzing with that new terminology. Does your mortgage have a fixed rate or is it an ARM (Adjustable Rate Mortgage)? If you’re taking out a second mortgage, is it a “closed end” second or a HELOC (Home Equity Line of Credit)? What is your DTI (debt to income ratio)? LTV is another acronym commonly used when discussing a loan program. Standing for Loan to Value, LTV can be defined several ways – and it has big implications for how much equity you have, and the size of a loan you can get.
Simply speaking, LTV refers to the percentage that results when the amount you owe on the loan is divided by the home’s value. Thus, if your loan is for $80,000 on a $100,000 home, your loan to value would be 80,000 divided by 100,000 or 80%. That also means that you have 20% equity in your home, or $20,000 of equity value in this scenario. Another way to think about loan-to-value is the opposite of equity. Equity is determined by subtracting the amount owed from the value of the home and would also register as a percentage when the difference is divided by the value of the home. You will find that the percentage LTV and the percentage of equity will always add up to 100%.
Cumulative Loan to Value or CLTV (sometimes referred to as “combined loan to value”) refers the total amount owed. It comes into play most often when two loans must be taken into consideration. For instance, if you are securing a first mortgage for 80% of the home’s value and a second mortgage for 15% of the home’s value, the LTV of the first is 80% and the LTV for the second is 15%, but the CLTV is 95% as the sum of both loans is equal to 95% of the home’s value. In this scenario, your equity is 5% of the home’s value.
When you apply for a loan, LTV and / or CLTV will be taken into account and will be used to determine several things depending on the mortgage program you’re using. For most programs, you’ll need a certain minimum credit score to qualify for higher loan-to-value.
The program may be available at a higher LTV if you have a higher credit score. The logic is that the higher loan-to-value, the more risky the loan is for your lender. The lender may also determine the need for personal mortgage insurance based on the LTV, requiring it for greater loan-to-value ratio and waiving it for lower percentages.
You’ll want to be aware of the percentage LTV on your loan and know the implications associated with it. Based on the LTV, some lenders may give you a better deal than others. This will help you be an educated consumer and choose, with the help of a loan officer, exactly the right program for you.