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What does 'loan-to-value ratio' (LTV) mean, and why does it matter?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The ratio of the loan amount to the property's appraised value — lenders use LTV to assess risk; higher LTV = higher risk; LTV above 80% typically requires private mortgage insurance (PMI)

  1. A The number of years remaining on the loan
  2. B The ratio of the loan amount to the property's appraised value — lenders use LTV to assess risk; higher LTV = higher risk; LTV above 80% typically requires private mortgage insurance (PMI)
  3. C The ratio of the property's value to its tax assessment
  4. D The ratio of the mortgage payment to monthly income

Why this is the answer

LOAN-TO-VALUE (LTV) = loan amount ÷ property value (appraised or purchase price, whichever is lower). Example: $280,000 loan on a $350,000 property = 80% LTV. Why it matters:

Risk assessment: Lenders view high LTV as higher risk (less equity cushion); PRIVATE MORTGAGE INSURANCE (PMI): Conventional loans with LTV above 80% require PMI — additional monthly insurance protecting the lender if the borrower defaults; PMI can be cancelled when LTV reaches 80% (by law at 78%).

Down payment relationship: 20% down payment = 80% LTV = no PMI; FHA loans allow LTV up to 96.5% (3.5% down) but require MIP (mortgage insurance premium) for the loan's life regardless of LTV; VA loans allow 100% LTV (zero down) with no PMI.

Source: Real Estate Exam, Loan-to-Value Ratio

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About this topic: Financing

PITI, mortgages versus deeds of trust, RESPA disclosures, and the math of down payments and interest are foundational. This is one of 9 Salesperson (National) questions on financing, each with a full explanation on a single study page.

New to this exam? Our Real Estate exam guide explains the format, scoring, and how to prepare.

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