Loan to Value (LTV) Ratio from the Real Estate Lender's Perspective

Homes and Mortgages
Homes and Mortgages. iStockPhoto

Owner Occupied Homes Get the Highest LTV's:

Lenders want the borrower to invest as much as possible into a real estate property, as this usually means that they'll work harder to avoid foreclosure and the loss of their equity. In the case of owner occupied homes, lenders allow higher Loan to Value Ratios.

History shows that homeowners do their best to keep their mortgages current and not lose their homes.

After all, where will they live then? LTV's from 80% to even 100% are available with the right credit rating to home buyers for their primary residences.

After the housing crash, LTV requirements tightened for a few years, but they began to loosen again by 2015.  Zero down payment loans were even becoming possible in some cases.  There were numerous programs allowing down payments as low as 3% to 5% of the home price.

Investment Properties Get Mortgages at Lower LTV's:

When it comes to real estate investors, lenders will generally require lower loan to value ratios. An investor will not lose the roof over their head if they go to foreclosure. They may have purchased a property with a certain required return on investment. If the rental income drops, an investor would be more likely to let the property go.

For these reasons, lenders want more investment from the purchaser to encourage them to stay out of foreclosure.

Also, if they must take the property back, the lower loan to value ratio will make it easier for them to sell the property and get their investment back.

I'm talking about residential single family and small multi-family properties.  Commercial properties, like apartment projects, have an entirely different set of underwriting criteria.

 The property's income stream is the primary factor in loan approval.  The credit histories of the owner(s) may not even be considered.  However, in marginal cases, their credit is considered and they may be asked to sign loan guarantees.

Vacation Homes are Treated More Like Investment Properties:

Though the vacation home buyer may not think of themselves as an investor, lenders don't think of them the same as a home owner in their primary residence. Generally, the resort or vacation property buyer will need to put up more of a down payment to result in a lower LTV.  The property's income is usually not considered, as it is too unreliable for this property type.

Loan to Value is Related to Risk and Reward:

Lenders want to make loans. It's how they make money in their business. However, they don't want to foreclose on properties, with the resulting expense to get them re-sold.

The loan to value ratio that's required for granting a loan will be based on the lender's experience with that type of property and buyer. They want the buyer to stick with the mortgage and stay out of foreclosure. But if foreclosure is necessary, the lower the LTV, the better the chance of recouping the lender's investment.

Even in a relatively simple single family residence foreclosure, in judicial foreclosure states the costs to the lender can run between $30,000 and $50,000.  Lenders rarely get back the entire amount owed on the mortgage from the sale of the property.  They do get made whole, or nearly so, if their loan is guaranteed by Fannie Mae, Freddie Mac, the FHA, etc.