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

A loan-to-value (LTV) ratio is a financial term used to express the ratio of a loan amount to the appraised value or purchase price of a property being financed. It is calculated by taking the loan amount and dividing it by the property value, often expressed as a percentage. For example, if a borrower is seeking a loan of $200,000 to purchase a home valued at $250,000, the LTV ratio would be 80% ($200,000 ÷ $250,000).

Understanding the LTV ratio is critical in the context of mortgage lending because it helps lenders assess risk. A higher LTV indicates a higher risk for lenders, as it suggests that the borrower has less equity in the property. This can lead to higher interest rates or the requirement for private mortgage insurance (PMI) to protect the lender in case of default.

The other options describe different aspects of mortgage and property financing, but they do not accurately define the LTV ratio. The percentage of a borrower's income going to mortgage payments relates to debt-to-income ratios, the amount available for a down payment refers to the upfront cash a borrower can provide, and the difference between market value and purchase price pertains to equity but does not represent the