The loan-to-value (LTV) ratio is a risk assessment metric used by banks. It compares how much you are borrowing to how much the asset is worth. Formula: LTV = (Loan Amount / Appraised Property Value) x 100.
Example: You want to buy a $400,000 house with a $320,000 mortgage. LTV = 320,000 / 400,000 = 80%. This means the bank is financing 80% of the property value, and you are putting down 20%. The lower the LTV, the safer it is for the bank.
Banks typically prefer LTV ratios of 80% or lower. Above 80%, most US lenders require private mortgage insurance (PMI). Some banks lend up to 95-97% LTV for first-time homebuyers, but at higher interest rates. During the 2008 crisis, 100%+ LTV loans (no down payment) contributed massively to the mortgage meltdown.