Loan-to-Value (LTV) Ratio

Loan-to-Value (LTV) Ratio is a financial term that measures the ratio of a loan amount to the appraised value of the property bEINg purchased. It is expressed as a percentage and is commonly used by lenders to assess risk when approving mortgage loans.

LTV is calculated using the formula:

LTV Ratio = (Loan Amount / Appraised Property Value) x 100

Examples:

  • If a borrower wants to purchase a home valued at $200,000 and takes out a mortgage of $150,000, the LTV ratio would be:
  • LTV = ($150,000 / $200,000) x 100 = 75%
  • In another case, if the same borrower had a mortgage of $180,000 on the same $200,000 home, the LTV ratio would be:
  • LTV = ($180,000 / $200,000) x 100 = 90%

Cases:

  • A lower LTV ratio (e.g., 80% or below) typically indicates less risk for lenders and may result in better loan terms.
  • A higher LTV ratio (e.g., above 80%) can indicate higher risk, often requiring private mortgage insurance (PMI) to protect the lender.