What does the loan-to-value ratio (LTV) measure?

The loan-to-value ratio (LTV) is a key financial metric used primarily in the real estate and lending industries, specifically to assess the risk associated with a loan. It measures the proportion of a loan amount relative to the appraised value of the asset being purchased, typically a property.

By understanding this ratio, lenders can better evaluate how much of a property’s value is being financed through a loan versus how much is being contributed as a down payment. For instance, if a borrower is seeking a $200,000 loan to purchase a home worth $250,000, the LTV would be 80% ($200,000 loan divided by $250,000 property value). This figure helps lenders determine the risk of default, with a higher LTV indicating higher risk because the borrower has less equity in the property.

This metric does not directly take income levels into account, nor does it represent the percentage of equity in a property or the relationship between total debts and assets. By focusing specifically on the asset's value, the LTV serves as a vital tool for both lenders and borrowers in managing financing terms and assessing investment potential.