Collateral

Collateral is the property used to secure the mortgage and is typically the subject property. How much money you are looking to borrow, with respect to the value of the property, is an important consideration in qualifying for various mortgage programs. This Loan-to-Value (LTV) ratio is described below.

Just as written documentation will be required to support your application's statements regarding income and assets, and a credit report will be used to verify your debts, an appraisal of the subject property will be required. The difference is that the value on the appraisal may not be the value used to determine your LTV ratio for a purchase. Instead, the LTV will be based on the LOWER of the appraised value or the purchase price.

So the LTV is determined by dividing the Loan Amount by the lower of the appraised value or the purchase price.

There are many implications with respect to LTVs. In no particular order, here are some general comments:

	LTVs over 80% typically require Mortgage Insurance (MI, sometimes called Private Mortgage Insurance or PMI).
	If you buy a house for 10% less than the appraised value, the LTV is based on the purchase price. This invalidates some no-money-down scenarios which claim that buying the house in this example can be 100% funded with a 90% LTV loan.
	If you buy a house for 10% more than the appraised value, that 10% will have to be paid by you as the LTV will be based on the appraised value.
	Some expensive homes, valued more than $500,000 - $1,000,000 depending on the mortgage program, may have to be appraised by two (2) different appraisers (at your expense). These jumbo loans are "non-conforming" simply because they are expensive homes and this translates to greater risk for the lender which they try to offset by getting 2 different appraisals.
	LTV limits are important aspects of loan programs. Exceeding the LTV of a loan program can throw you into another program with very different rates and costs. There tends to be less flexibility with LTVs than with other ratios used to evaluate a loan package.