How is the loan-to-value (LTV) ratio calculated?

The loan-to-value (LTV) ratio is a financial term used to express the ratio of a loan to the value of an asset purchased. Specifically, it is calculated by dividing the mortgage loan amount by the property's appraised value or purchase price, whichever is lower. This ratio is essential in mortgage lending because it helps lenders assess the risk associated with the loan.

In the context of option B, the correct formula accurately represents this relationship, highlighting the proportion of the property's value that is financed through borrowed funds. A lower LTV ratio is generally more favorable to lenders because it indicates that the borrower has a greater degree of equity in the property and a reduced risk of default.

Other options do not provide the correct method for calculating LTV. For instance, option A reverses the relationship, leading to an incorrect interpretation of how the LTV is derived. Option C refers to property equity relative to total debt, which is more indicative of the owner's equity position but does not indicate the proportion of financing. Lastly, option D describes a subtraction, which does not relate to how LTV is typically calculated and does not provide a ratio.