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Table of Contents

  • Introduction
  • An Example
  • References

Introduction

The loan-to-value (LTV) ratio is an assessment financial institutions and other lenders examine before approving a mortgage. It is the mortgage amount divided by the appraised property value. Loan assessments with high LTV ratios are considered high-risk and so, if approved will have a higher interest rate. 


Also, to offset this risk, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance called private mortgage insurance (PMI). For conventional loans, this insurance will typically be required as long as the LTV ratio is higher than 80 percent. FHA loans typically allow this number to be much closer to 100 percent. 


The usual way for a home buyer to reduce his or her LTV ratio is to either put down a larger down payment or make enough monthly payments for this ratio to fall below 80 percent.

An Example

 

Consider this simple example. Suppose a home is appraised for $100,000, but the homeowner agrees to sell it for $90,000. Let’s also assume the home buyer agrees to put down a $10,000 down payment. That would mean the loan itself would be $80,000 and LTV ratio would be $80,000 divided by $100,000 or 80 percent.

References

  • “What Is Loan-to-Value (LTV)?” Investopedia, https://www.investopedia.com/terms/l/loantovalue.asp. Accessed 22 July 2022.
Mensah Alkebu-Lan

About The Author

With 15+ years of experience in designing, developing, and maintaining JVM-based applications, ensuring seamless delivery of various IT projects, and successfully creating and executing software applications. Mensah also possesses strong expertise in leveraging Agile/Scrum methodologies, producing detailed technical documentation, and designing optimal software solutions.