Loan-to-Value Ratio
The loan-to-value ratio (LTV) is the loan amount divided by the property value, expressed as a percentage. It shows how much of the property the lender is financing and how much the borrower covers in cash. A $320,000 loan on a $400,000 home is an 80% LTV, with a 20% down payment.
LTV is foundational to the financing section of the national exam. It is tested as a direct definition, as a simple division problem (find the loan, the value, or the percentage), and as a scenario asking what the lender requires when LTV climbs above 80%.
The ratio in one sentence
The loan-to-value ratio (LTV) tells you what share of a property the lender is financing. It is the loan amount divided by the property value, written as a percentage. On a $400,000 purchase with a $320,000 loan, the LTV is 80%, which means the borrower put 20% down. Every other rule built on LTV flows from how far that percentage sits above or below the lender's comfort line.
The formula and what counts as value
The math is a single division:
LTV = loan amount / property value
The tricky part is the denominator. "Value" is the lesser of the sales price and the appraised value. If a buyer agrees to pay $400,000 but the appraisal comes in at $380,000, the lender sizes the loan against $380,000. An 80% loan is then $304,000, not $320,000, and the borrower must cover the extra $16,000 in cash. This is why appraisal problems on the exam change the loan amount even when the contract price has not moved.
Down payment and starting equity
The down payment is the purchase price minus the loan. It is also the buyer's initial equity in the property, the slice the owner actually owns from day one. The three figures always move together: pick any two and the third is determined.
| Item | Amount | Share |
|---|---|---|
| Purchase price | $400,000 | 100% |
| Loan amount | $320,000 | 80% LTV |
| Down payment | $80,000 | 20% equity |
Why lenders watch the 80% line
LTV is a risk measure. The higher the LTV, the less cushion the lender has if the borrower defaults and the property must be sold. At or below 80%, many lenders require no mortgage insurance. Above 80%, lenders commonly require private mortgage insurance (PMI) as a condition of approval, because the borrower's thin equity makes the loan riskier. Conventional, FHA, and VA loans handle this differently, and the exact thresholds and insurance rules vary by loan program and by state, so the exam expects the general principle rather than a single national number.
A worked example
A home appraises at $250,000, and the lender caps its loan at 80% LTV. The lender will advance $250,000 x 0.80 = $200,000. The borrower must supply the remaining $50,000 as the down payment. If the same buyer instead wanted a 90% LTV, the loan would be $225,000 and the down payment would drop to $25,000, but PMI would typically enter the picture.
How it appears on the exam
Expect three flavors. First, a definition question asking exactly what LTV measures. Second, a straight calculation from two of the three numbers. Third, a scenario tying a high LTV to a lender condition, most often mortgage insurance. Keep the numerator clean (loan only) and the denominator honest (the lower of price or appraisal), and the distractors lose their grip.
Memory trick
LAD
LTV is three related numbers, and knowing any two gives you the third. Remember L-A-D.
- L
Loan amount: the principal the lender advances, the numerator in the ratio
- A
Appraised value: the value basis, or the sales price when it is lower
- D
Down payment: the price minus the loan, which is also the buyer's starting equity
Screenshot this: LAD is how you'll remember loan-to-value ratio on exam day.
How the exam tricks you on this
The classic distractor is a value basis that adds the interest to the loan. LTV compares the loan amount alone to the property value; it never includes total interest, closing costs, or the sum of all payments over the life of the loan. If an answer choice describes a ratio of "principal plus total interest" to value, it is wrong.
Two more patterns to watch for:
- Loan-to-value and down payment are opposites, not synonyms. LTV measures the financed share; the down payment is what is left. An 80% LTV means a 20% down payment, and a 90% LTV means a 10% down payment. When a question asks for the down payment, subtract the LTV from 100% before you do any math.
- Use the lower of appraised value or sales price. When a property appraises for less than the contract price, lenders base LTV on the appraisal, which pushes more of the gap onto the borrower's cash. An 80% loan on a low appraisal funds less than the borrower expected.
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Related terms
PITI
PITI stands for principal, interest, taxes, and insurance, the four parts of a typical monthly mortgage payment. Principal pays down the loan balance, interest is the cost of borrowing, taxes are property taxes collected for the county, and insurance covers hazard and, when required, mortgage insurance. Lenders use PITI to measure affordability.
Read definitionAmortization
Amortization is the process of paying off a mortgage through scheduled periodic payments. Each payment covers interest on the current balance plus a portion of principal, and over the term the principal share grows while the interest share shrinks. A fully amortizing loan reaches a zero balance at the end of its term.
Read definitionDiscount Points
A discount point is a fee equal to one percent of the loan amount, paid at closing to lower the interest rate on the mortgage. Points are a form of prepaid interest: the borrower pays more up front to reduce the cost of borrowing over the life of the loan. Two points on a $300,000 loan cost $6,000.
Read definition
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