Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Loan-to-Value (LTV) Ratio

What it is:

The loan-to-value (LTV) ratio is a calculation that helps lenders measure mortgage risk. The formula to calculate the loan-to-value ratio is:

Loan to value = Mortgage amount / Appraised value of property

How it works (Example):

For example, let's say Jane Doe wants to buy a house for $500,000. She plans to put $70,000 down and finance the rest ($430,000) with a mortgage. Using the formula above, her loan-to-value ratio would be:

Loan to value = ($500,000 - $70,000) / $500,000 = 86%

Borrowers whose LTV ratios are over 100% are considered "upside down" on their mortgages. That means they owe more on the house than the house is worth.

Why it Matters:

All other things being equal, the higher the LTV ratio, the riskier a mortgage tends to be from the perspective of a lender. This doesn't always mean the lender will reject the borrower. Rather, it may mean the lender may charge a higher interest rate or require the borrower to purchase mortgage insurance.

Typically, lenders require borrowers to buy mortgage insurance if the LTV is above 80%.  FHA lenders may require LTV ratios of 96.5% or lower; VA lenders may allow for a 100% LTV, meaning those lenders are willing to accept considerable risk (usually because the government is guaranteeing the loan in whole or in part)