How is the loan-to-value (LTV) ratio calculated?

How is the loan-to-value (LTV) ratio calculated?

• A. LTV = loan amount ÷ appraised value or purchase price.
• B. LTV = appraised value ÷ loan amount.
• C. LTV = monthly payment ÷ purchase price.
• D. LTV = down payment ÷ loan amount.

Answer: (A)

The lender looks at how much is being borrowed compared to what the property is worth. This relationship is the loan-to-value ratio, or LTV. It is calculated by dividing the loan amount by the property's value, using either the appraised value or the purchase price—whichever is lower. Expressed as a percentage, the LTV shows how much of the property’s value is being financed. For example, if you borrow $300,000 and the property’s appraised value is $350,000, the LTV would be 300,000 ÷ 350,000 = 0.857, or 85%. If the purchase price is lower, say $320,000, you would use that lower amount in the denominator, giving 300,000 ÷ 320,000 = 0.938, or 93.75%. The key idea is that the ratio compares the loan amount to the property’s value, not to monthly payments or the down payment.

The lender looks at how much is being borrowed compared to what the property is worth. This relationship is the loan-to-value ratio, or LTV. It is calculated by dividing the loan amount by the property's value, using either the appraised value or the purchase price—whichever is lower. Expressed as a percentage, the LTV shows how much of the property’s value is being financed.

For example, if you borrow $300,000 and the property’s appraised value is $350,000, the LTV would be 300,000 ÷ 350,000 = 0.857, or 85%. If the purchase price is lower, say $320,000, you would use that lower amount in the denominator, giving 300,000 ÷ 320,000 = 0.938, or 93.75%. The key idea is that the ratio compares the loan amount to the property’s value, not to monthly payments or the down payment.