When a lender considers approving a borrower for a mortgage, she considers the risk in her investment vs. the value of the property. Her loan against the value of the property is the loan-to-value ratio (LTV). The higher the LTV, the greater the chance she will face a loss if the borrower defaults and the property is sold. She would prefer a lower LTV for less risk but may have to settle for an average LTV to satisfy both herself and the borrower.
Calculation of LTV
The average loan-to-value ratio varies from state to state but is generally around 80 percent. The LTV is calculated by taking the amount you owe on your total mortgage and dividing it by the home's value. For example, if your total mortgage is $80,000 on a $100,000 home, your loan to value would be 80,000 divided by 100,000, or 80 percent. You have 20 percent equity in your home or $20,000 in this example.
High LTV and Negative LTV
A high LTV exceeds 90 percent of the real estate's appraised value. Lenders consider high LTV for borrowers who want to consolidate their credit card and other consumer debts if it reduces the borrower's payments to one payment to the lender. In some cases you can borrow 25 percent to 50 percent more than your home is worth. When borrowers owe more on their mortgages than their homes are worth, the result is a negative LTV, in some cases as high as 125 percent.
Risk to the Lender on Average LTV
According to the Federal Deposit Insurance Corporation, traditional mortgages with average LTV loans, as opposed to high LTV loans, are less likely to default. The borrower on average LTV loans needs stronger credit and follows more stringent credit underwriting requirements in order to qualify. Lenders offer a shorter term and are less vulnerable to circumstances beyond control such as death.
No Mortgage Insurance
The benefit of having an average LTV of up to 80 percent is that you do not need to have mortgage insurance added to the mortgage payment. Federal Housing Administration (FHA) loans may be suitable for those who do not qualify for the average LTV because they may not have the necessary down payment to cover at least 20 percent of the cost. The benefit of a higher LTV is lower interest rates, and longer term, but borrowers must have mortgage insurance payments of at least five years in case they default on the loan.