Homebuyers

Avoid Dire Lending Straits: Want Your LTV

By now, if you've been exploring various financing options for purchasing a home, you've probably encountered enough acronyms and abbreviations like ARM (Adjustable-Rate mortgage) DTI (debt-to-income ratio), PMI (private mortgage insurance), and VA loans (Veterans Administration loans) to make your head spin.

While the mortgage industry admittedly uses a great deal of shorthand to do its work, consumers must try to unpack the jargon as much as possible, so they can better understand the loan process, and, ultimately get the best loan for their situation.

Regarding the three following terms, mortgage lenders use them to convey the maximum amount of money they're willing to lend to the borrower and how much money in the form of a down payment they expect the borrower to contribute. This relationship is most often expressed as a ratio.

LTV or loan-to-value expresses the ratio of a loan to the value of an asset purchased. So, were you to purchase a home with an appraised value of $100,000, and put down a down payment of 20% of the purchase price, your LTV would be 80. This LTV ratio will be expressed as 80/20.

If you opted for a Conventional 97, backed by Fannie Mae and Freddie Mac, and put down just $3,000, your LTV would be 97, written as 97/3. The higher the first number, the higher the risk the lender is willing to take.

TLTV or total loan-to-value expresses the ratio of not one lien, but all the liens against the value of your collateral. So, using the same purchase price of $100,000, if you had a second mortgage on the property for, say, $15,000, your TLTV would be 95, leaving you with 5% equity.

TLTV is also referred to as CLTV or combined loan-to-value because you're adding together all the liens against the asset.

HTLTV or high total loan-to-value often involves a Home Equity Line of Credit (HELOC), another type of second or subordinate mortgage. Sticking with the same $100,000 purchase in the above examples, if your first mortgage was for 80,000, and you took out a line of credit for 15,000, your HTLTV would still be 95.

And here's the tricky part, it would still be 95, even if you used only a portion, say, just $5,000, of your $15,000 credit line. That's because the lender assumes that you will eventually use all the funds available in your line of credit.

Your TLTV, however, would be 85 ($80,000 first mortgage + $5,000), because TLTV measures just the money borrowed.

Whew! As we said, mortgage insiders use lots of jargon, but, ultimately values matter. They say a lot about your lender. While one lender may feel comfortable and be very experienced at making high LTV loans, another more conservative lender might require a borrower to have more skin in the game.

So, to get the possible loan, and improve your negotiating skills, you need to know not only your lenders and limits but also your LTVs.