What is the loan-to-value (LTV) ratio?

The loan-to-value (LTV) ratio is a critical concept in mortgage lending that expresses the relationship between the amount of a loan and the appraised value of the property being financed. Specifically, it is calculated by dividing the loan amount by the property's value, then multiplying by 100 to obtain a percentage. This ratio is significant because it helps lenders assess the risk associated with the loan. A lower LTV ratio typically indicates a lower risk, as it suggests that the borrower has more equity in the property.

For example, if a borrower wants to purchase a property worth $200,000 and takes out a loan for $160,000, the LTV ratio would be calculated as follows: $160,000 (loan amount) divided by $200,000 (property value) gives an LTV ratio of 0.8 or 80%. Lenders often use this ratio to determine whether to approve a loan or the interest rate to assign—lower LTV ratios might qualify for better terms.

Understanding the LTV ratio is essential for borrowers as it directly influences the mortgage process, including underwriting decisions, required down payments, and mortgage insurance requirements.