Loan-to-Value Ratio (LTV)
A ratio comparing the loan amount to the appraised value of the asset being financed, used to assess lending risk.
What is LTV Ratio?
The loan-to-value (LTV) ratio is a lending risk metric calculated by dividing the outstanding loan amount by the appraised value of the collateral asset. In mortgages, it equals (loan amount / home value) × 100. A lower LTV indicates less lender risk because there is more equity cushion if the borrower defaults and the home must be sold. Conventional mortgage lenders typically require an LTV of 80% or below to avoid private mortgage insurance (PMI). Combined LTV (CLTV) includes all liens on a property (first mortgage + HELOC). LTV is also used in auto loans, commercial real estate lending, and securities-backed lending.
Example
A home is appraised at $500,000 and the buyer borrows $400,000. LTV = $400,000 / $500,000 = 80%. At exactly 80% LTV, the buyer avoids PMI on a conventional loan. If the buyer had put down only $50,000 (borrowing $450,000), LTV = 90%, triggering the PMI requirement. As the loan balance pays down over time, LTV falls and eventually the borrower can request PMI removal.