Loan-to-Value Ratio (LTV)
Definition
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Example
A buyer purchases a $400,000 home with a $60,000 down payment, borrowing $340,000. LTV = $340,000 / $400,000 = 85%. Since LTV exceeds 80%, PMI is required on a conventional loan. Once the loan balance drops to $320,000 (80% LTV), the borrower can request PMI removal.
Exam Tip
Know the formula: LTV = Loan Amount / Property Value. The key threshold is 80% — above 80% LTV, PMI is required for conventional loans. Remember that lenders use the LOWER of purchase price or appraised value. The exam may give you down payment percentage and ask for LTV (100% minus down payment percentage = LTV).
Related Financing Terms
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Loan-to-Value Ratio (LTV) and other financing concepts.