Definition: The loan to value ratio (LTV) tells you how much of a property is being financed. It is a way to tell how much equity you have in a property.
For example, assume you buy a home worth $100,000. If your mortgage is for $80,000, then your loan to value ratio is 80% (because your loan of $80,000 is 80% of the home's total value).
Calculate the LTV ratio by dividing the loan value into the property value: 80,000/100,000 = 0.8.
Higher loan to value ratios mean higher risk for the lender. If you fail to pay back a home loan, for example, the lender can foreclose on your home (or sell it). If they have to sell for a higher price - because your loan to value ratio is high - their job is more difficult. On the other hand, if you've only borrowed 20% of a property's value, the chances are good that your lender will get their money back.
Some lenders will allow you to borrow more than 100% of a property's value if your credit is good.
Also Known As: LTV Ratio
