Before issuing a loan, lenders typically like to know how much of an asset's value is currently being used as collateral for a loan. The total loan-to-value (LTV) ratio, also known as a combined loan-to-value ratio, is a measure of the total of all debts secured by an asset compared to the value of the asset itself.
The total LTV is most common in the context of homeownership. People often take out multiple loans secured by the same home, so the total LTV combines all of these to determine how much of the home's equity is used up. This ratio affects lending decisions, not only for the first mortgage, but also for a home equity loan or a refinance. Although it is not as common to calculate the total LTV in other contexts, you could calculate it for any type of secured loan, such as an auto loan.
The total LTV is equal to the total outstanding loan balances divided by the value of the property. Find the total outstanding loan balances by adding together the current balance on each of the loans secured by the property. If it is a new loan, the current balance is the amount borrowed, whereas on an old loan, the balance will have been reduced by payments. The value of the property is the lesser of the purchase price or the appraised value at the time of the purchase. For a home equity loan or refinance, the value is the current appraised value of the home.
Say that an individual wanted to purchase a home and reached an agreement with the seller on a purchase price of $190,000. The individual has a down payment of $20,000 saved, so the amount to finance is $170,000. The home was appraised for $190,500, which is more than the purchase price, so the purchase price is the number to use in the calculation. In this case, the total LTV is $170,000/$190,000, or 89.47 percent. If, eight years later, the homeowner has reduced the loan balance to $147,000 and wants to get a home equity loan for $15,000, the lender will recalculate the total LTV. If the house were appraised now for $210,000, the current total LTV with the equity loan would be $162,000/$210,000, or 77.14 percent.
Lenders use the LTV to assess the risk of lending. The higher the LTV ratio, the riskier the loan is. This is because if the value of the asset drops, the loan will no longer be fully secured. Lenders typically have a maximum allowable total LTV, although it varies from one lender to another. For example, FHA loans allow an LTV of up to 97 percent, but private lenders might cap it at 90 percent, requiring a larger down payment. Home equity lenders often prefer a total LTV ratio of closer to 80 percent. In addition, lenders often charge higher interest rates or require mortgage insurance if the LTV is above a specific threshold.