Definition
The loan-to-value (LTV) ratio is a measure of the total loan amount as a percentage of the appraised value of the collateral.
Analysis
The LTV ratio is an important component of mortgage lending. A variety of mortgage products are geared to handle anywhere from 80% LTV ratio (conventional mortgage) to 100% LTV ratio, although some refinance loan products have gone as high as 125% LTV.
The LTV ratio is calculated by dividing the loan amount by the appraised value of the loan. Therefore, a homeowner attempting to borrow $85,000 on a property with an appraised value of $100,000 would not qualify for a conventional mortgage because the LTV ratio is 85%.
They would be required to buy private mortgage insurance until the loan balance fell below 80% of the appraised value. Of course, they could request a new appraisal if they believe the property has gained in value.
