What determines a borrower’s loan-to-value (LTV) ratio?

The loan-to-value (LTV) ratio is a critical metric used by lenders to assess risk in mortgage lending. It is determined by taking the loan amount and dividing it by either the appraised value or the purchase price of the property. This calculation provides a percentage that reflects how much of the property's value is being financed through the loan.

For instance, if a borrower wants to purchase a home valued at $400,000 and requests a loan of $320,000, the LTV ratio would be calculated as follows: $320,000 (loan amount) divided by $400,000 (appraised value), which equates to an LTV of 80%. This 80% indicates that the borrower is financing 80% of the property value, while the remaining 20% represents the down payment.

Understanding LTV is crucial for both borrowers and lenders, as it influences loan terms, interest rates, and whether mortgage insurance is required. A lower LTV generally indicates less risk for the lender, which can result in more favorable loan conditions for the borrower.

The other options relate to aspects of the borrowing process but do not correctly define the LTV ratio. For example, the amount of down payment affects the LTV indirectly, as