Loan-to-Value (LTV)
The loan balance divided by the property's value — a core measure of how much equity protects a loan.
Loan-to-value (LTV) is the ratio of a loan's balance to the value of the property securing it, expressed as a percentage. A $120,000 loan on a $160,000 home has an LTV of 75%. The lower the LTV, the more equity cushions the loan, and the safer the position of whoever holds the note.
LTV is the lending world's standard risk gauge, and it carries straight into note buying — with one important twist.
LTV vs. ITV
When you buy a note at a discount, the more relevant figure is investment-to-value (ITV): the price actually paid divided by property value. LTV describes the loan; ITV describes the buyer's basis. Because notes change hands below their unpaid principal balance, a note's ITV is almost always lower than its original LTV. A loan written at 80% LTV might be bought at a price equal to just 60% ITV — and that extra cushion is precisely why discounted note buying can be conservative even on higher-LTV paper.
How LTV affects what you're paid
When you sell a note, the LTV at the time of sale signals risk:
- Low LTV (≤ 65%): Large equity cushion. If the borrower defaults, the property comfortably covers the balance. These notes earn the strongest offers.
- Moderate LTV (65%–80%): Typical for many owner-financed notes; priced on payment history and other factors.
- High LTV (> 80%): Thin equity. A small drop in property value or a costly foreclosure can wipe out the cushion, so buyers apply a deeper discount or require a higher yield.
LTV changes over time
LTV is not static. Two forces move it in the seller's favor:
- Amortization. Every payment reduces the balance, lowering the numerator. See amortization.
- Appreciation. If the property value rises, the denominator grows.
A note that started at 85% LTV may sit comfortably at 65% after a few years of payments and appreciation — improving both the risk profile and the price a buyer will offer.
Getting LTV right
Accurate LTV depends on an accurate property value. A recent appraisal, broker price opinion, or strong comparable sales help a buyer confirm a favorable LTV and support a better quote. As with ITV, the speed of foreclosure in the note's state also affects how much a given LTV is worth — equity only protects you if you can reach it efficiently.