What is the loan amount as a percentage of the purchase price or appraised value, whichever is lower, called?

The term that describes the loan amount as a percentage of the purchase price or appraised value, whichever is lower, is known as Loan to Value (LTV). LTV is a key metric used by lenders to assess risk when evaluating mortgage applications. It shows how much of a property is financed compared to its value, which helps lenders understand the potential risk of default and the equity position of the borrower. A higher LTV ratio generally indicates higher risk since less equity is held in the property, while a lower LTV suggests more equity and potentially less risk.

Understanding LTV is essential for borrowers as it impacts the terms of the loan, including interest rates, mortgage insurance requirements, and the total amount the lender is willing to finance. This ratio is a vital piece of information in making financial decisions regarding real estate purchases and loans.