Loan-to-value Definition

The loan-to-value ratio is a simply derived and commonly used formula in common use by financial institutions. The LTV is the ratio of the value of a loan to the fair market value of an asset used to secure the loan; it is most commonly encountered in the real estate market as a tool to quickly gauge mortgage values. For example, if a person wants to borrow $350,000 to purchase a home valued at $575,000, the LTV ratio would be $350,000/$575,000 or about 61%.

LTV ratios below about 80% are considered to be a low-risk loan while a 100% LTV ratio loan would be offered only to a wealthy person with an impeccable credit history. In the US, Fannie Mae and Freddie Mac conforming loans must have an LTV ratio of less than 80%.