LTV Ratio
The loan-to-value (LTV) ratio is probably the most important of the 3 underwriting ratios.
The loan-to-value ratio is defined as:
LTV Ratio = Total Loan Balances (1st mtg+2nd mtg +3rd mtg) / Fair Market Value of the
Property
First let's look at the numerator. If the borrower is only applying for a first mortgage,
and there will be no other loans on the property, then the beginning balance of the new
loan requested should be inserted in the numerator.
However, if the borrower is applying for a second mortgage, then the
"underwriter" (the person who determines whether or not the loan qualifies)
should insert the sum of the first and second mortgages in the numerator. Similiarly, if
the borrower
is applying for a third mortgage, then the underwriter should insert the sum of the first,
second and third mortgages into the numerator.
When the borrower is applying for a second or third mortgage, the loan-to-value ratio is
often known as the combined loan-to-value ratio (CLTV ratio).
Now let's look at the denominator. Generally the fair market value of a property is
determined by an appraisal. There is one important exception, however. When the proceeds
of a mortgage loan are used to buy the same property that is
securing the loan, then that mortgage is known as a "purchase money loan." If
the appraisal comes in lower than the purchase price in a "purchase money"
transaction, then the lender will use the LOWER of the purchase price or appraisal.
Mortgage brokers are often asked by real estate agents and buyers to base their loan on
the appraised value rather than the purchase price. Their claim is that they have
negotiated a super deal and that the property is worth much more than
what they are paying for it. This may be so (although generally untrue), but lenders
always base their maximum loan on the lower of purchase price or appraisal. The lender's
argument (its their money, so there is really very little argument) is that an appraisal
is really no more than an estimate of fair market
value, no matter how competent or conscientious the appraiser may be. The only true
indicator of value is the marketplace in which "a willing buyer and a willing seller,
each in full knowledge of the salient facts, and neither under undue
pressure, agree upon terms." If the property sells for "X," then it is
probably only worth "X." |
Commercial Loans
Underwriting Guidelines
Commercial Mortgage Ratios
Commercial LTV Ratio
Commercial Debt Ratios
Commercial Debt Service Ratio
Commercial Property Types
Questions to Ask Yourself
10 Myths and Facts About SBA
Commercial Loan Checklist
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