LoantoValue

Loantovalue, commonly known as loan-to-value or LTV, is a financial metric used by lenders to assess the risk of a loan that is secured by collateral, typically real estate. It expresses the ratio of the loan amount to the appraised value of the collateral or to the purchase price, whichever is lower at the time of underwriting.

The formula is LTV = loan amount divided by collateral value, and the result is stated as a percentage. In practice, many lenders use the lesser of the appraised value and the purchase price when calculating loantovalue to guard against overvaluation. For example, a borrower seeking a $320,000 loan on a property valued at $400,000 and purchased for $360,000 would have an LTV of 80% if the appraised value is used.

Loantovalue is a key input in mortgage underwriting and influences terms such as interest rate, required down payment, and whether mortgage insurance is needed. Generally, lower LTVs indicate more borrower equity and associated lower risk for lenders, often resulting in more favorable terms. Higher LTVs imply greater risk and may lead to higher interest rates, additional fees, private mortgage insurance, or stricter qualification criteria. Lenders frequently set maximum LTV thresholds for different loan programs.

Variants include combined loan-to-value (CLTV), which accounts for multiple liens on the property, and loan-to-cost (LTC) used in construction or development financing. While loantovalue is a useful risk measure, it does not capture borrower income, other debts, or property condition, which are also considered in lending decisions. The concept also applies to other asset-backed lending, such as auto and business loans.