To calculate the Loan-to-Price (LTP) ratio, divide the total loan amount by the property’s purchase price or appraised value, whichever is lower. Multiply the result by 100 to express it as a percentage. For example, a $300,000 loan for a $400,000 property yields an LTP of 75% ($300,000 ÷ $400,000 × 100). Lenders use this ratio to assess borrowing risk and determine loan eligibility.

The LTP ratio is critical because it directly correlates with a borrower’s equity stake and default risk. A higher LTP (e.g., above 80%) signals less skin in the game, increasing lender concern about repayment capacity during market downturns. Data from the Federal Housing Finance Agency (FHFA) shows that conforming loans (under $729,750) typically cap LTP at 80% for conventional financing, while jumbo loans (above $729,750) may allow up to 90%. During the COVID-19 pandemic, LTPs rose to 90% for some conforming loans due to record-low interest rates, as noted by the Mortgage Bankers Association (MBA). However, excessive LTPs can lead to higher default rates, as evidenced by the 2008 housing crisis, where subprime loans with LTPs exceeding 90% contributed to mass foreclosures. Lenders often pair LTP with debt-to-income (DTI) ratios to holistically evaluate risk, ensuring borrowers can sustain payments even if home values decline. This dual metric approach aligns with guidelines from the Consumer Financial Protection Bureau (CFPB), which mandates LTP thresholds to mitigate systemic risk in housing markets.