What Is Loan-to-Value Ratio (LTV) in Real Estate?

The Loan-to-Value Ratio (LTV) is a key mortgage metric that compares the size of a loan to the value of the property securing it. Lenders use LTV to measure risk—lower LTV means less risk, while higher LTV indicates the borrower has less equity and therefore represents more risk to the lender.

✅ How LTV Works

LTV is calculated using a simple formula:

LTV = (Loan Amount ÷ Appraised Property Value) × 100

For example:

  • Loan amount: $300,000
  • Appraised value: $400,000
  • LTV = 75%

A lower LTV shows the borrower is putting more money down, which reduces the lender’s risk and often results in better loan terms.

📊 Why LTV Matters

Lenders evaluate LTV to determine loan approval, mortgage rates, and whether mortgage insurance is required. A strong LTV benefits buyers in several ways:

  • Better interest rates: Lower LTV borrowers usually qualify for lower mortgage rates.
  • Reduced mortgage insurance costs: Conventional loans typically require PMI for LTV above 80%.
  • Higher likelihood of approval: Strong LTV ratios demonstrate financial stability.
  • More equity from the start: A lower LTV means the buyer owns more of the property on day one.

💡 How LTV Changes Over Time

Your LTV ratio doesn’t stay the same. It shifts based on:

  • Paying down principal: As you make mortgage payments, your loan balance decreases, lowering your LTV.
  • Property value changes: Home appreciation reduces LTV; depreciation increases it.
  • Making extra principal payments: Accelerates equity growth and improves your LTV faster.

A stronger LTV helps borrowers refinance, drop PMI sooner, or sell with more equity.

🏡 LTV & FSBO Transactions

For FSBO sellers, understanding LTV can help you assess the strength of a buyer’s financing. Buyers with high LTV ratios may have tighter budgets, higher mortgage insurance costs, or less flexibility to cover appraisal gaps.

Buyers with lower LTV ratios are often stronger candidates—they bring more cash to the table and usually face fewer loan approval issues.

For more mortgage fundamentals, visit the Mortgage Guide.