What does "loan-to-value" (LTV) ratio indicate?

The loan-to-value (LTV) ratio is a critical metric in the mortgage lending process that measures the relationship between the amount of a loan and the appraised value of the property being purchased or refinanced. Specifically, it is calculated by dividing the loan amount by the appraised value of the property and is typically expressed as a percentage.

This ratio serves multiple purposes in assessing risk for both lenders and borrowers. For lenders, a lower LTV indicates that the borrower has more equity in the property and thus may present a lower risk if the borrower defaults, since the lender would have a greater cushion of property value to fall back on in the event of foreclosure. Conversely, higher LTV ratios suggest that the borrower is financing more of the property’s value, which can be riskier for lenders, particularly if the market experiences a downturn and property values decline.

In practice, regulatory guidelines might stipulate maximum LTV ratios for specific loan types, affecting the terms and conditions a borrower can receive. Therefore, understanding the LTV ratio is essential for anyone involved in real estate transactions, whether they are buyers, sellers, or mortgage professionals.