What is Loan-To-Vaue Ratio (LTV) And How Is It Calculated?

What is loan to value ratio (LTV)?

A loan-to-value (LTV) ratio is a measurement lenders use to compare your loan amount for a home against the value of that property, whether you already own the home or plan to buy it. Lenders use your LTV ratio during mortgage qualification to assess the risk of lending you money and to determine if you’ll need to pay mortgage insurance. LTV is expressed as a percentage and lenders prefer lower LTV ratios, such as 80% or less. The higher your down payment or existing equity, the lower your LTV ratio.

Why is LTV important?

Having a lower LTV ratio will not only help you qualify for a loan, but it will allow you to access lower mortgage rates, which can save you thousands of dollars over the life of your loan. And, a desirable LTV ratio can ensure you don’t have to pay monthly mortgage insurance, which can increase your mortgage by hundreds of dollars each month.

LTV helps lenders determine your ability to repay the loan

When you apply for a mortgage loan, lenders use multiple data points to complete their risk assessment on your application. Simply put, they want to ensure they don’t take on unnecessary financial risk by lending to you. Your LTV ratio is one important tool they use in qualifying you for a loan, along with your credit score, income, employment history and debt-to-income ratio.

A low LTV shows a lender that you’re making more of an up-front investment in the home. From the lender’s perspective, that means you’re less likely to default on your mortgage and if you did, they’d have an easier time recouping their portion of the home price by reselling as a foreclosure.

For example, if you’re paying half of a home’s purchase price in cash and financing the other half, you’d have a 50% LTV, making you a very desirable borrower. If you stopped paying your mortgage, the lender could easily sell the property for more than half of its value and recoup their investment.

LTV factors into your interest rate

Since your lender will see your low LTV ratio as a sign of your creditworthiness, they’ll likely offer you lower interest rates. Even a difference of a quarter to a half of a percent in your interest rate can mean thousands of dollars saved over a 15- or 30-year mortgage. Or, a better rate may mean you can afford a more expensive home than if you were paying more interest each month.

LTV determines if you must pay for mortgage insurance

Your LTV ratio also impacts whether you’ll be required to carry mortgage insurance on your loan. Typically, borrowers with an LTV of more than 80% are required to pay for mortgage insurance, which is an insurance policy that protects the lender if you default on your loan. An LTV of more than 80% means you’re making a down payment of less than 20%, which is high risk in the lender’s eyes and triggers the need to insure their investment.

On a conventional loan, this type of insurance is called private mortgage insurance (PMI). On an FHA loan, it serves the same purpose but is called a mortgage insurance premium (MIP). Mortgage insurance premiums on FHA loans require an up-front payment at closing (1.75% of the loan amount) except Fannie Mae and Freddie Mac loans, followed by monthly payments.

While the one-time premium at closing affects the amount of cash you’ll need at closing, it’s the monthly mortgage insurance premiums that can really affect your monthly budget, since you’ll have to pay it alongside your principal and interest payment each month.

What is a good LTV ratio?

The vast majority of lenders consider 80% a good loan-to-value ratio, but the lower the better. An LTV above 80% may cost you more to borrow the money you need, or you may be denied a loan altogether.

Maximum loan-to-value (LTV) ratios by loan type

Individual mortgage lenders can set their own qualification requirements around LTV, depending on either the types of mortgages they offer or their overall risk tolerance. And, your LTV is always considered in combination with other details, like your credit score, income, assets and the condition of the property. Here are the most common LTV limits by loan type.

*without private mortgage insurance (PMI)

Loan-to-value ratio requirements by loan type

LTV for conventional loans

Lenders offering conventional loans backed by Fannie Mae and Freddie Mac will accept LTVs of up to 97%. Borrowers with an LTV higher than 80% must pay monthly private mortgage insurance (PMI). There are loans called lender paid mortgage insurance, and in those cases, rates are typically 0.25%-0.75% higher because the mortgage insurance is accounted for by the increased rate. Alternatively, you can also pre-pay PMI to avoid the monthly charge.

LTV for FHA loans

FHA lenders typically accept borrowers with LTVs of up to 96.5%—meaning a down payment of as little as 3.5%. This is because the program is designed for first-time buyers who may have less cash available for a down payment. With an LTV of higher than 80%, you’ll have to pay a mortgage insurance premium (MIP), which includes an up-front, one-time payment at closing and a regular monthly payment for 11 years. If your LTV is greater than 90%, MIP is due each month until the loan is fully repaid or you refinance.

LTV for USDA and VA loans

Lenders offering USDA and VA loans will accept LTVs of up to 100%, which means you’re not making a down payment and financing the entire cost of the home. You won’t have to pay mortgage insurance, but there are less expensive loan fees called annual guarantee fees you’ll be responsible for paying.

When do lenders check loan-to-value ratios?

Lenders will check your LTV ratio twice during the purchase process: Once during the loan application process when they determine how much they’re willing to lend you, and then again during underwriting, before your deal closes.

How to calculate LTV?

To calculate your LTV, divide your loan amount by the home’s appraised value or purchase price. The number you get will be a decimal; multiply by 100 to express as a percentage.

Your loan amount is the total funds you plan to borrow. You can also arrive at this number by subtracting your down payment from the purchase price of the home.

In a balanced home market, the home’s appraised value and its purchase price should be very similar. Before closing, your lender will order an appraisal on the home to ensure it is indeed worth the sale price.

In a competitive market where buyers are competing in bidding wars, the sale price may exceed the appraised value. This is why lenders will often recalculate your LTV after the appraisal is done and before underwriting is complete.

LTV calculation example with a $15,000 down payment

If you’re buying a home that costs $350,000 and offering a $15,000 down payment, you’ll need a loan for $335,000. Here is the LTV formula:

Appraised home value: $350,000

Loan amount: $335,000

LTV formula: $335,000/$350,000 = 0.957 or 96% LTV

LTV calculation example with $50,000 down payment

Again, if you’re buying a home that costs $350,000, but this time you have a $50,000 down payment, you’ll need a loan for $300,000. Here is the LTV formula:

Appraised home value: $350,000

Loan amount: $300,000

LTV formula: $300,000/$350,000 = 0.857 or 86% LTV

LTV calculation example with $100,000 down payment

Finally, if you’re buying a home that costs $350,000, but with a larger down payment of $100,000, you’ll need a loan for $250,000. Here is the LTV formula:

Appraised home value: $350,000

Loan amount: $250,000

LTV formula: $250,000/$350,000 = 0.714 or 71% LTV

What is CLTV?

CLTV stands for combined loan to value. It’s a similar ratio to an LTV ratio, but it takes into consideration all money borrowed against a property in addition to your first mortgage. Lenders use CLTV ratios when evaluating your eligibility for a home equity line of credit (HELOC), home equity loan, refinance or a creative finance arrangement, such as an 80/10/10 for a jumbo loan.

How is CLTV calculated?

Your CLTV is calculated by adding up all loan balances related to a property and dividing the sum by the appraised value. Here’s an example. Let’s say you have a remaining balance of $200,000 on a home that’s worth $350,000. Your LTV in that case would be $200,000 divided by $350,000: a 57% loan-to-value ratio. But you also have a HELOC on the property with a balance of $30,000 and a home equity loan you still owe $40,000 on. That means you owe $270,000 in total ($200,000 +$30,000 +$40,000). Divide that total amount of $270,000 by the property value of $350,000, and your combined loan-to-value (CLTV) ratio is 77%. 

Appraised home value: $350,000

Total amount Owed: $270,000

LTV formula: $270,000/$350,000 = 0.77 or 77% LTV

An LTV of 57% is great, and while a CLTV of 77% is still good, it may have different risk implications for your lender.

How to lower mortgage LTV?

There are multiple strategies you can use to lower your LTV and be in a better position to get a more affordable loan, such as increasing your down payment, lowering your offer price or working with a lender to creatively finance your home purchase.

Increase your down payment

The larger your down payment, the lower your LTV. It can be a challenge to come up with additional cash for your down payment, but many buyers explore tapping into their savings, selling stock or using gift money.

Lower your purchase price or budget

It’s always important to shop for homes within your budget. If you’re having trouble qualifying for a home due to the LTV, consider lowering your budget to make your down payment go further.

Get creative with your lender

Experienced mortgage brokers or lenders are skilled at helping people come up with creative solutions that put homeownership within reach. Common strategies include refinancing after purchase to drop mortgage insurance, using an adjustable-rate mortgage (ARM) or taking out a 80/10/10 piggyback loan.

Both home buyers and existing homeowners interested in refinancing should take the time to calculate their loan-to-value ratio before getting preapproved. A good LTV ratio — under 80% — gives you access to the widest range of financing options and ensures you won’t have to pay for costly mortgage insurance.

 Our loan officers are always available to answer any questions you may have about home financing. Reach out whenever you’re ready to begin shopping for a home.