What is the definition of loan-to-value (LTV) and how does a higher LTV typically affect financing terms for a property acquisition?

• A. LTV = loan amount divided by appraised value; higher LTV increases leverage risk, typically raises interest rate, reduces debt service coverage, and may require additional equity or mortgage insurance.
• B. LTV = appraised value divided by loan amount.
• C. LTV = debt service divided by NOI.
• D. LTV = equity invested divided by appraised value.

Answer: (A)

Loan-to-value measures how much of a property's value is being financed with debt. It’s calculated as the loan amount divided by the appraised value (or purchase price, whichever is lower). When LTV is higher, you’re using more leverage, which increases the lender’s risk. To compensate, lenders typically raise interest rates and may tighten other terms. A higher loan size also means higher debt service, which can squeeze cash flow and reduce the debt service coverage ratio. To offset the added risk, lenders may require more borrower equity or mortgage insurance. The other options mix up different metrics or invert the ratio, which is why they don’t describe LTV.