What is a loan-to-value (LTV) ratio?

A loan-to-value (LTV) ratio is defined as the relationship of the loan amount to the appraised value or purchase price of the property, whichever is lower. It is a crucial metric used by lenders to assess the risk of a mortgage loan. A higher LTV ratio indicates that the borrower is financing a larger portion of the property's value with debt and may be viewed as a higher risk by lenders, potentially leading to stricter lending requirements, higher interest rates, or the necessity for private mortgage insurance.

This ratio helps lenders evaluate how much equity the borrower has in the property and is a significant factor in determining loan approval and the terms of the loan. Other options, such as the total cost of the property, property maintenance costs, or the mortgage interest rate, do not directly define or measure the relationship between the loan amount and property value, making them unrelated to the concept of the LTV ratio.