Loan to value (LTV) is a ratio used by lenders to determine how much money they are willing to lend you based on the value of the property you want to buy.
It is determined by dividing the mortgage balance by the assessed value of the home.
For example, if you want to buy a house that is appraised at $200,000, and you are applying for a mortgage for $160,000, the loan to value ratio would be 80% (160,000/200,000).
Lenders should take into account the loan to value ratio since it reveals the degree of risk associated with the loan.
Loans are riskier for lenders when their loan-to-value ratio is greater.
This is because if you default on the loan, the lender may not be able to recover the full amount of the loan by selling the property.
Lenders typically have a maximum loan to value ratio they are willing to offer for different types of mortgages.
For example, for a conventional mortgage, the maximum loan to value ratio is typically 80%.