Loan-to-Value Ratio

What is a loan-to-value ratio?

A loan-to-value ratio (LTV) is a ratio of a mortgage loan principal to the property’s appraised value or its sales price, whichever is lower.  For example, if a borrower obtains an $80,000 loan on a property that is appraised for $100,000, the loan-to-value ratio would be 80%.

Who sets the loan-to-value ratio?

Loan-to-value ratios depend on the individual lender’s policy and governmental banking regulations.  Lenders generally feel that the greater the equity a borrower has in a property, the less likely that the borrower will default and lose the property through foreclosure.  In other words, the lower the loan-to-value ratio as a percentage, the lower the likelihood the borrower will default.

Loan-to-Value RatioHow high can loan-to-value ratios go?

When private mortgage insurance is used, the lender can sometimes offer 90 to 95 percent loan-to-value ratios, as long as the property is going to be owner-occupied.  Investors might qualify for 80 percent financing, FHA ratios are fixed by statute, and a veteran with a VA loan can borrow the purchase price or 100 percent loan-to-value.

What would a loan-to-value question look like on the real estate exam?

If you encounter an LTV question on the real estate licensing exam, it will look something like this:

Which of the following types of loans would usually have the highest loan-to-value ratio:

A. Conventional

Answer: C
Explanation: On a conventional loan, an FHA loan, or an FHA-VA loan, the borrower will have to make a down payment. Under the VA program, it is possible to purchase property without a down payment.

What else can help me prepare to pass my real estate licensing exam on my first attempt?

Other tips to help you pass your real estate licensing exam on your first attempt:

Real Estate Test Taking Tips

How to Pass the Real Estate Exam

Real Estate Exam Math Made Easy

Also, check out our question of the day videos on our YouTube channel:

PassMasters Real Estate Exam Prep YouTube Channel