Real Estate Salesperson · Real estate math calculations · 7 min read
Loan to Value, Down Payment and Interest
- Calculate loan-to-value (LTV), combined loan-to-value (CLTV), and down payment amounts using standard real estate math formulas.
- Solve simple interest, monthly interest, and per diem interest problems for residential real estate mortgages.
- Explain how loan amortization, payment structures (including PITI), and appraisal shortfalls impact a borrower's mortgage balance and equity.
Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV)
The loan-to-value (LTV) ratio expresses a mortgage loan amount as a percentage of the property's value. To find the LTV ratio, divide the mortgage loan amount by the property value. If you know the property value and the LTV percentage, multiply the property value by the LTV percentage to find the loan amount. Conversely, if you know the loan amount and the LTV ratio, divide the loan amount by the LTV ratio to determine the property value.
For a purchase loan, lenders generally calculate the LTV ratio using the lesser of the purchase price or the appraised value. A higher LTV ratio represents greater financial risk for the lender. A lower LTV generally means the borrower has more equity and the lender faces less potential loss if the borrower defaults, though default risk also depends on other factors. Conventional loans with an LTV ratio exceeding 80% typically require private mortgage insurance (PMI).
Different loan programs allow different maximum LTV ratios. FHA-insured purchase loans permit qualifying borrowers to make low down payments, often as little as 3.5%, which results in high LTV ratios. Eligible borrowers may qualify for a VA-guaranteed purchase loan with no down payment, subject to VA valuation and lender requirements; financing the VA funding fee can make the total loan balance exceed 100% of the value used for the loan. When a buyer takes on junior mortgages or second liens in addition to a primary loan, these secondary loans increase the combined loan-to-value (CLTV) ratio. The CLTV is calculated by dividing the sum of all mortgage liens on a property by the property's value.
| Loan Program | Minimum Typical Down Payment | Maximum Loan-to-Value (LTV) | Insurance / Special Feature |
|---|---|---|---|
| Conventional (>80% LTV) | Varies (under 20%) | Exceeds 80% | Typically requires private mortgage insurance (PMI) |
| Conventional (Standard 80/20) | 20% | 80% | No PMI typically required |
| FHA-Insured Purchase Loan | Often as little as 3.5% | The base FHA purchase loan can generally reach 96.5% LTV with a 3.5% down payment; financing the upfront mortgage insurance premium can make the total loan balance higher. | FHA mortgage insurance backing |
| VA-Guaranteed Loan | 0% (zero down payment) | The base VA purchase loan may reach 100% of the applicable value with no down payment; financing the VA funding fee can make the total loan balance exceed 100%. | Guaranteed by Department of Veterans Affairs |
Common mistakes
- Using the higher purchase price instead of the lower appraised value when calculating the maximum loan amount under LTV guidelines.
- Forgetting to divide the annual interest by 12 when calculating a single month's interest portion of an amortizing mortgage payment.
- Subtracting the monthly interest from the loan balance rather than subtracting the principal reduction amount.
- Assuming an earnest money deposit constitutes the buyer's full down payment rather than an initial good-faith deposit credited at closing.
Key points
- Loan-to-value (LTV) is the mortgage loan amount divided by property value, calculated using the lesser of purchase price or appraised value for purchase loans.
- Combined loan-to-value (CLTV) measures all mortgage liens against the property value, and conventional loans exceeding 80% LTV typically require private mortgage insurance (PMI).
- When a purchase is financed with one mortgage and no other purchase-price financing, the down payment equals the purchase price minus that mortgage; it generally equals the buyer's initial equity only if the purchase price reflects market value and there are no other liens.
- Simple interest uses the formula I = P × R × T; one month's interest equals the principal balance multiplied by the annual interest rate divided by 12.
- Mortgage interest is commonly paid in arrears, and per diem interest is calculated by dividing annual interest by 360 or 365, depending on loan terms and law.
- In a fully amortizing fixed-rate loan, total monthly principal and interest payments stay constant, while the interest portion decreases and the principal reduction increases each month.
- Salespersons work under a supervising broker and may explain general financing concepts, but should refer borrower-specific loan terms and eligibility to lending professionals and legal interpretations to qualified legal counsel, consistent with state law and broker policy.
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Sample lesson: Area, Acreage and Unit ConversionsOriginal lesson written for Real Estate Salesperson practice · updated October 31, 2026. Exam names are trademarks of their owners; tests.global is not affiliated with them.