Loan-to-value
Loan-to-value is the loan balance divided by the property's value.
A $160,000 loan against a $200,000 property is 80 percent LTV. It is the same question as equity spread asked from the lender's side.
What it governs#
Mortgage insurance. Conventional lending below 20 percent down — above 80 percent LTV — requires private mortgage insurance, which the borrower can request cancelled at 80 percent of original value and which terminates automatically at 78 percent.
Pricing. Higher LTV means more risk to the lender and is priced accordingly.
Whether a loan happens at all. Investment property, cash-out refinances and non-owner-occupied lending each carry lower maximum LTVs than an ordinary purchase.
Which value#
On a purchase: the lower of appraised value and purchase price.
That is why a low appraisal changes the loan rather than the price. A buyer under contract at $250,000 with an appraisal at $235,000 is financed against $235,000, and the difference comes from their own funds.
On a refinance: appraised value.
Either way it is the lender's appraisal. An owner's view of what their property is worth does not enter the calculation.
Above 100 percent#
Underwater — the debt exceeds the value.
At that point refinancing is generally unavailable, because no lender writes a loan larger than the collateral supports. Selling requires the existing lender to accept less than it is owed, which is a short sale and needs their approval.
The remaining options are a modification that makes the payment sustainable, a short sale, a deed in lieu, or letting the foreclosure proceed.
In Minnesota that last option is less catastrophic than most owners fear: Minn. Stat. 582.30 subd. 2 bars a deficiency judgment in most residential foreclosures by advertisement, so the debt generally ends at the sale rather than following the borrower.
Why it moves without anyone doing anything#
Both terms change.
The balance falls slowly through amortisation — and on a thirty-year loan, very slowly at first, because early payments are mostly interest.
The value moves with the market, in either direction, and considerably faster.
A household that bought with 5 percent down in a falling market can be underwater within a year without missing a payment. That is not a failure of budgeting; it is the denominator moving.
In the foreclosure data#
LTV is the same measurement as the bid-to-value ratio that shows up so clearly in Govire's redemption figures.
Where the sheriff's sale bid was under 50 percent of value — low effective LTV, substantial equity — 58.1 percent of windows ended in redemption. Where the bid was 80 percent or more, 20.0 percent did.
Owners with equity act. Owners without it generally cannot.