What is loan-to-value (LTV) and why is it important?

• A. LTV is the property value divided by the loan amount
• B. LTV is the down payment amount
• C. LTV is the loan amount divided by the property value
• D. LTV is the interest rate divided by the loan term

Answer: (C)

LTV measures how much of the home's value is being financed with a loan. It’s calculated by dividing the loan amount by the property's value (or appraised value, usually the lower of price and appraisal). This ratio helps lenders assess risk and determine things like whether mortgage insurance is needed, what interest rate to offer, and whether the loan is likely to be approved. A lower LTV means more borrower equity and lower risk for the lender, which often leads to better terms. A higher LTV signals more financing relative to value, increasing risk and typically resulting in higher rates or PMI requirements. For example, borrowing $320,000 on a $400,000 home is an 80% LTV; reducing the loan to $300,000 drops the LTV to 75%. The other options describe either the inverse relationship, the down payment, or an unrelated ratio, none of which define LTV.