Loan-to-value ratio (LTV)
The loan-to-value (LTV) ratio in real estate is a financial metric used by lenders to assess the risk of a mortgage loan by comparing the amount of the loan to the appraised value or purchase price of the property. It is calculated by dividing the loan amount by the property’s value and expressed as a percentage.
For example, if a borrower is seeking a mortgage loan of $160,000 to purchase a home appraised at $200,000, the LTV ratio would be 80% ($160,000 / $200,000 x 100).
LTV ratios are important because they help lenders determine the level of risk associated with a loan. Generally, the lower the LTV ratio, the less risk the lender assumes, as the borrower has more equity in the property. Loans with lower LTV ratios are often considered less risky and may qualify for better interest rates and terms.
Lenders typically have maximum LTV ratios that they are willing to accept for different types of loans, and borrowers may be required to pay private mortgage insurance (PMI) if their LTV ratio exceeds a certain threshold, typically 80% for conventional loans.