A qualifying ratio taken by dividing the loan amount by the value of the home.
The loan-to-value (LTV) is a qualifying ratio taken by dividing the loan amount by the value of the home. If there are multiple loans being obtained for the purchase, then the mortgage lender must calculate the combined loan-to-value (CLTV) ratio. The CLTV is taken by dividing the total combined loan amounts by the value of the home. The value of the home is defined as the lower of the purchase price or appraised value.
LTV ratios are used for qualification purposes. Different loan products allow different maximum LTV ratios, capping the amount of financing allowed by setting a minimum amount that the borrower must contribute through their down payment. For example: conforming financing normally requires a minimum 5% down payment from the borrower; consequently, the loan amount cannot exceed 95% of the purchase price (or appraised value, whichever is lower). Therefore, the conforming loan requires a minimum 5% down payment so that the LTV ratio does not exceed 95%.