What Is LTV?
What Is LTV?
This week I wanted to get into something that drives me absolutely bonkers, and that is when mortgage professionals and real estate agents use terminology and acronyms that most people don’t understand. A lot of mortgage people, they don’t get that most people don’t think about mortgages and real estate every day. They don’t realize that people don’t know these terms. They don’t know these acronyms, and they just use them freely, and it confuses a lot of people.
Something that I strive to do every day in my business is explain things in ways that people understand that don’t do real estate every day. I try to use terms that are common terms that anyone would understand, and I try not to use acronyms, and when I do, I explain the acronym.
That’s what I wanted to do today is get into one of the most common acronyms that’s used in the mortgage industry, LTV, and explain what that is, and how to understand what that concept is.
LTV stands for loan-to-value ratio, and basically what it is, it’s how much you borrow compared to the appraised value of the home. So, if you borrow, just use easy numbers, borrow $80,000 and the appraised value of the house is $100,000, you’re at 80% LTV or 80 LTV. That’s on a basic level what LTV is.
Now, when you’re doing a refinance it’s based on appraised value. Now, when you’re buying a home, it’s based on either the lesser of the purchase price of the home or the appraised value. I’ll say that again, it’s the lesser of the purchase price or the appraised value. Let’s take that same $100,000 house, you’re putting 20% down and getting an $80,000 loan. That’s an 80% loan-to-value loan. If the home appraises for $100,000 or more, that’s great. That’s exactly what it is.
But if it appraises for less, then the loan-to-value ratio is based on that lower appraised value numbers. Let’s say the appraisal comes in at $90,000. Well, now your loan-to-value ratio is $80,000 divided by $90,000. Look, I don’t have my calculator super handy. Let me just do that math real quick. You’d get 88% loan-to-value ratio all of a sudden, so in that scenario, you’d actually have to put down more money to get to 80% loan-to-value and avoid mortgage insurance, which I’ve talked about in other videos and I can go into in more detail if you’d like to give me a call as to what that is, but that’s a situation where LTV can change.
There’s another term related to TV called CLTV, and what CLTV is, is combined loan-to-value. This is if you have, let’s say a home equity loan on your house or a second mortgage, what they do is they combine that with your primary loan, they take the combination of those two loan balances, and they divide that by your appraised value, and that’s your CLTV or your combined loan-to-value.
I hope that helps you understand that basic acronym, that basic terminology and concept. Just give me a call if you have any questions about anything else more mortgage related or about your situation. I’m always happy to answer those questions, and you guys have a great rest of your day. Thanks for watching. My name’s RJ Baxter at Fairway Independent Mortgage.
