How is the loan-to-value ratio (LTV) calculated?

The loan-to-value ratio (LTV) is a key financial metric used by lenders to assess risk before approving a mortgage. The correct calculation of LTV is determined by dividing the loan amount by the appraised property value.

When calculating LTV, the loan amount represents the total debt being borrowed, while the appraised property value reflects the market value of the property as assessed by a qualified appraiser. This ratio helps lenders evaluate how much of the property's value is being financed through borrowing versus what the borrower is contributing as a down payment. A higher LTV indicates that the borrower has less equity in the property, which can be a risk factor for lenders, as it suggests that a larger proportion of the property's value is being financed through debt.

The other options provided do not correctly define the LTV calculation. The first option inaccurately inverts the relationship by placing property value as the numerator. The second option involves interest rates, which are unrelated to the LTV calculation, focusing instead on the cost of borrowing. The last option mixes selling price with total costs, which does not pertain to the loan-to-value ratio, further illustrating the importance of clearly understanding the definitions and components involved in determining LTV.