What does LTV stand for and how is it calculated?

• A. Loan-to-Value ratio equals the loan amount divided by the appraised value or purchase price, whichever is lower.
• B. Loan-to-Value ratio equals the appraised value divided by loan amount.
• C. LTV is the ratio of monthly payment to income.
• D. LTV equals the lower of appraised value or purchase price divided by loan amount.

Answer: (A)

The main concept is how the loan-to-value ratio is defined and calculated in mortgage lending. LTV measures risk by comparing the loan amount to the value of the property used to secure the loan, using the lower of the appraised value or the purchase price as the value base. So the formula is LTV = loan amount ÷ (lower of appraised value or purchase price).

For example, if you’re buying a home for 300,000 and the appraised value is 320,000, the denominator is 300,000, so an 240,000 loan yields an LTV of 80%. If the appraisal comes in lower, say 280,000, while the purchase price remains 300,000, the denominator becomes 280,000, and the LTV would be 240,000 ÷ 280,000 ≈ 85.7%.

The other ways people sometimes describe LTV are not correct: inverting the ratio (appraised value or purchase price divided by the loan amount) or mixing in a different metric like monthly payment to income, or using the wrong value in the numerator. The standard definition is the loan amount divided by the lower of the appraised value or purchase price.