What does an 80% loan-to-value ratio indicate in mortgage lending?

An 80% loan-to-value (LTV) ratio indicates that the lender covers 80% of the property's purchase price. In mortgage lending, the LTV ratio is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower. Therefore, if the ratio is 80%, this means that the lender is willing to finance that percentage of the property's value while the remaining 20% typically represents the buyer's down payment.

This concept is crucial for both lenders and borrowers because it helps assess risk; a higher LTV ratio often indicates more risk for the lender since the buyer has less invested in the property. In this case, covering 80% of the purchase price establishes a common standard for evaluating mortgage applications, as it signifies a substantial commitment from the lender while also requiring buyers to contribute a significant down payment. This option best reflects the meaning of an 80% LTV ratio in real estate transactions.