How the estimated LTV Ratio on MonitorBase Predictive and Migration Alerts are calculated.
After the initial downpayment made on a loan, two things can affect a home's LTV ratio, the market value of a home and the payments made by the borrower against the loan amount on the home.
LTVratio = MA/ PV
Mortgage Amount (MA): A portion of each monthly mortgage payment pays down the unpaid balance of the loan on the home until it is eventually paid off. As the Mortgage Amount is slowly reduced over the life of the loan so is the LTV.
- Property Value (PV): As the market value of a home increases that additional value of the home belongs to the borrower effectively growing the equity they have on the home and lowering their overall loan to value ratio. If the market value of the home decreases over time the opposite will happen.
Mortgage Amount = 190,000
Property Value = 280,000
190,000 / 280,000 = 67.86% LTV
The Estimated LTV that MonitorBase delivers its clients takes both of these factors into account. We look at the estimated home value of the property using a public data source and match that up with the current unpaid loan amount data that we receive from Experian with the prescreened credit data.
LTV Ratio and How it Affects Loan Underwriting:
If a borrower is applying for a loan with little to no down payment, therefore the loan would have a higher LTV, the lender views the loan as having a higher risk of going into default. This is because there is little to no equity built up in the property and should a foreclosure take place the lender would have a harder time selling the home for enough to pay off the remaining balance of the loan.
Because of this if a borrower is taking out a high LTV loan they are likely going to be required to pay for private mortgage insurance (PMI), on their monthly payments, to protect the lender should the property go into default before the LTV drops to a predetermined level after scheduled monthly payments where the mortgage insurance will automatically come off of the monthly payments of the loan. Additionally, the LTV Ratio is used to determine which loan types a borrower can qualify for as well as the interest rates that they will get especially if their LTV is greater than 80%.
The LTV Ratio is also used by lenders to determine if a homeowner has enough equity in their home to take out a home equity line of credit, do a cash-out refinance, or if they’re over 62 years old do a reverse mortgage (HECM).