The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases.
Low LTV ratios (below 80%) may carry with them lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low credit scores, previous late payments in their mortgage history, high debt-to-income ratios, high loan amounts or cash-out requirements, insufficient reserves and/or no income.
However, an LTV higher than 80% may carry Mortgage Insurance requirements, which will in turn offer the borrower a lower interest rate.
The aggregate principal balance(s) of all mortgages on a property divided by its appraised value or purchase price, whichever is less.
In the United States, conforming loans that meet Fannie Mae and Freddie Mac underwriting guidelines are limited to a loan-to-value ratio (LTV) that is less than or equal to 80%.
The LTV for the stand-alone seconds and Home Equity Line of Credit would be the loan balance as a percentage of the appraised value.
The option of high LVR loans expands access to property ownership but also introduces increased risk for both lenders and borrowers.
It underscores the market's nuanced approach to promoting homeownership while maintaining financial stability, primarily through risk mitigation strategies like guarantor-backed loans.
[8] In the run-up to the national / global economic problems mortgages with an LTV of up to 125% were quite common, but lenders stopped offering them in 2008.