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Key Takeaways Loan-to-value LTV is an often used ratio in mortgage lending to determine the amount necessary to put in a down-payment and whether a lender will extend credit to a borrower. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. All information, including rates and fees, are accurate as of the date of publication and are updated as provided by our partners.
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The use of any other trade name, copyright, or trademark is for identification and reference purposes only and does not imply any association with the copyright or trademark holder of their product or brand. Develop and improve products. List of Partners vendors. A maximum loan-to-value ratio is the largest allowable ratio of a loan's size to the dollar value of the property. The higher the loan-to-value ratio, the bigger the portion of the purchase price of a home is financed.
Since the home is collateral for the loan, the loan-to-value ratio is a measure of risk used by lenders. Different loan programs are viewed to have different risk factors, and therefore, have different maximum loan-to-value ratios.
A maximum loan-to-value ratio will be different for every type of business and every type of asset. When determining a maximum loan-to-value ratio, a lender wants to ensure that it can recoup any losses if the borrower defaults and it has to sell the asset to cover the unpaid portion of the loan. The lower the maximum loan-to-value ratio is, the less risk the lender is taking on because they are putting up less money. Maximum loan-to-value ratios are often used in home loans and auto loans.
Some home loan programs allow for a high maximum loan-to-value ratio and are designed specifically for low- to moderate-income and first-time home buyers. It is wise for a borrower to investigate these options before selecting any one lender's high loan-to-value program. The combination of a mortgage loan along with a down payment is used to buy a home for most home buyers. The property serves as collateral for the loan and so in the event the purchaser can no longer make the loan payments, the lender takes possession of the property.
The lender can then sell the property and use the proceeds to repay themselves in the amount of the borrowed money. In the loan approval process, the lender places a maximum allowable amount on the loan versus the property value because if the loan is too big a portion of the property value, the bank may not be able to get the entire value back in the event of a borrower default.
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