LTV stands for Loan-to-value, and it refers to a ratio that shows the relationship between a particular loan amount and the value of a certain property. The LTV ratio is usually arrived at by dividing the amount of a loan with either of two things – the sale price of the property or its appraised value. Whichever of the two results is the lower is the LTV used.
It should be remembered that LTV is one of the many elements that a lender employs in order to find out if a mortgage application should be approved or not. The LTV is relatively easy to interpret once given by the lender since it is expressed in percentage. For example, a $25,000 loan for a $50,000 piece of property will have a 25 percent LTV. A particular mortgage will be seen to have a high LTV if the loan amount is high compared to the downpayment given by the borrower or the equity that is placed on the property.
Generally, lending institutions see loans that have a high LTV as a high risk investment, especially when compared with others where the borrower can provide a bigger down payment or have a larger equity value. From the perspective of the lending company, a person who has invested less in a home will feel that he has less to lose if he decides to default on the loan he took, compared to a person who actually invested more money on a property or has a higher equity on the property.