What does LTV stand for in real estate finance?

LTV stands for Loan-to-Value, which is a key metric in real estate finance that expresses the ratio of a loan to the appraised value of the property being financed. It is calculated by dividing the amount of the mortgage loan by the appraised value of the property, then multiplying by 100 to get a percentage.

This ratio is critical for lenders, as it helps assess the risk associated with a mortgage loan. A higher LTV ratio indicates a higher risk for lenders since it suggests that the borrower has a smaller equity stake in the property. Consequently, lenders may impose stricter underwriting criteria or higher interest rates on loans with high LTV ratios. This metric is also relevant to borrowers, as a lower LTV can lead to better loan terms and conditions.

Understanding LTV allows individuals involved in real estate transactions, whether they are investors or homebuyers, to make informed decisions regarding financing options and investment risks.