What is loan-to-value ratio (LTV)?

Loan-to-value measures how much of a collateral asset's value is financed by debt. A lower LTV means the borrower has more equity in the asset and the lender has a larger cushion if it must liquidate the collateral. For purchase transactions, value is commonly the lesser of the purchase price or the appraised value.

LTV is a core underwriting limit for real estate and equipment loans. US federal banking agencies publish supervisory LTV limits for real estate loans, ranging from 65% for raw land to 85% for improved property, and institutions set internal policy limits at or below these levels. Combined loan-to-value (CLTV) adds junior liens to the calculation. LTV also drives loss severity estimates, since a lower LTV usually means a higher recovery after default.

LTV is only as reliable as the valuation behind it. Stale appraisals, optimistic stabilized values for construction projects and values that ignore market declines can understate risk. Lenders should track whether the ratio is based on as-is, as-completed or as-stabilized value. LTV at origination can change significantly as the loan amortizes and as collateral values move, so portfolio reviews should refresh values for larger or weaker credits.