What is Loan-to-Value (LTV) Ratio?

The Loan-to-Value (LTV) ratio is a financial metric used by lenders to assess the risk associated with a loan, most often in the context of mortgage lending. It is calculated by dividing the loan amount by the appraised value of the collateral, usually a property, being used to secure the loan. The LTV ratio is expressed as a percentage and is an important factor in determining the terms and conditions of the loan, such as the interest rate and the requirement for mortgage insurance.

LTV Ratio = (Loan Amount / Appraised Value of the Asset) x 100

A lower LTV ratio indicates that the borrower has more equity in the property, which means they have a larger financial stake and are less likely to default on the loan. This is considered less risky for the lender. Conversely, a higher LTV ratio means that the borrower has less equity in the property and is considered to be a higher risk for the lender, as they are more likely to default on the loan in case of financial difficulties.

Lenders typically prefer lower LTV ratios and may impose stricter lending requirements, such as higher credit scores and lower debt-to-income ratios, for borrowers with higher LTV ratios. Additionally, loans with higher LTV ratios may require the borrower to purchase private mortgage insurance (PMI) to protect the lender in case of default.

In general, a Loan-to-Value ratio of 80% or less is considered desirable, as it often allows borrowers to avoid PMI and secure better loan terms. However, specific LTV requirements may vary depending on the lender and the type of loan being offered.