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MORTGAGE 101
Commercial Loan to Value Ratio (CLV)
Commercial Loan
To Value Ratios
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.
Mortgage brokers 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
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