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. Similarly, 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.
Commercial loan lenders
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 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." |