Loan to Value (LTV)
Definition and meaning of Loan to Value (LTV) in real estate.
Loan-to-value is a financial ratio that compares the size of a mortgage loan to the appraised value or purchase price of the property being purchased, whichever is lower.
In more detail
Lenders use this percentage to assess the risk of a mortgage loan, as a higher ratio indicates a higher risk of default for the lender. An LTV ratio above eighty percent typically requires the borrower to purchase private mortgage insurance, which protects the lender if the borrower defaults.
The ratio is calculated by dividing the total loan amount by the lower of the property's appraised value or purchase price. To lower the LTV ratio, a buyer must make a larger down payment, which reduces the lender's risk and can lead to better loan terms.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Formula | Loan amount divided by property value |
| Risk threshold | Eighty percent or higher typically requires mortgage insurance |
| Base value | Lower of purchase price or appraised value |
A buyer makes a twenty percent down payment on a home purchase and finances the remaining eighty percent of the purchase price, resulting in an eighty percent loan-to-value ratio.
Frequently asked questions
How does a borrower lower their loan-to-value ratio?
The most direct way to lower the LTV ratio is by making a larger down payment at the time of purchase or paying down the principal balance over time.
Why do lenders care about the loan-to-value ratio?
Lenders use LTV to measure equity cushion; if a borrower defaults on a high-LTV loan, the lender is more likely to lose money during a foreclosure sale.