loan-to-value ratio

Loan-to-value ratio (LTV)

The ratio of money borrowed on a property to the property's fair market value.

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Loan-to-Value Ratio

1. In mortgages, the ratio of the amount of a potential mortgage to the value of the property it is intended to finance, expressed as a percentage. It is used as a way to assess the risk of making a particular mortgage loan. A low loan-to-value ratio is seen as indicating a low risk to the lender. Most mortgage lenders require a maximum loan-to-value ratio of 75%. That is, a borrower is usually expected to pay for 25% of the value of a property out-of-pocket.

2. More broadly, a ratio of the amount of a potential loan to the asset it is intended to finance. In addition to gauging the risk involved in making the loan, it tells the borrower whether or not the loan can be repaid if he/she sells the asset. This can be important if the borrower finds himself/herself in a position in which he/she cannot make payments.

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loan-to-value (LTV) ratio

The relationship between the principal amount of a loan and the appraised value of the property serving as security. A loan of $80,000 on a property appraised at $100,000 is an 80 percent LTV.Residential mortgages with an LTV of 80 percent or less qualify for FHA insurance; if the ratio is higher, then borrowers may be required to obtain private mortgage insurance.Generally speaking, the higher the LTV, the higher the interest rate will be because the lender has assumed more risk.Those risks are as follows:(1) When there is little equity in the property, it has a low hostage value; the borrower is more likely to default and walk away from the property because the borrower has little to lose. (2) At foreclosure, the property may not bring a price sufficient to pay off the principal balance of the loan, much less the accrued interest and costs of foreclosure.

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Loan-to-Value Ratio (LTV)

The loan amount divided by the lesser of the selling price or the appraised value.

The LTV and down payment are different ways of expressing the same facts. See Down Payment/Down Payment and LTV.