Loan to Value (LTV) September 8
Loan to Value or “LTV” is a term used by mortgage lenders to refer to the amount of money they are willing to loan to customers who put up real estate or other assets as collateral. LTV is a ratio or a percentage; in other words, of what a bank will loan compared with what a borrower’s property is worth.
If a home is worth $200,000, for example, and the LTV is 100 percent, the lender is willing to lend $200,000. If the LTV in this example were only 80 percent, the lender would agree to loan 80 percent of $200,000 – or $160,000.
Before the current mortgage crisis sent banks and homeowners scrambling to protect themselves from mortgage losses and plummeting real estate prices, it was not uncommon for LTVs to be as high as 97 to 100 percent. Last summer most of them fell to 90 percent, as banks began to anticipate the damage from the subprime mortgage mess. But lenders did not predict how widespread the damage would be, and now they are cutting LTVs even more to avoid lending money for property that might lose much of its current value.
Bank of America and Chase recently adjusted their LTV guidelines on many mortgage loans down to 80 percent, and other financial institutions are expected to do the same. That means that consumers wanting to take out a mortgage or refinance a home can expect to get less – and they may also be required to pay more. In this kind of tight-money environment, lenders typically raise loan fees and interest rates while required higher amounts of collateral.
So those planning to borrow in the coming months should anticipate that they will get no more than 80 percent of what their property is worth. As is normal, that valuation will be arrived at through a professional appraisal. But appraisal numbers are now much more conservative than those conducted before the housing crisis began, because appraisers are not sure how much more real estate prices might fall.