Mortgage lenders consider many factors when determining if you’re eligible for a home loan. Loan-to-value ratio is one of the more prominent factors.

It's important to understand the meaning of LTV and how it affects your qualifying for a mortgage, so you will be better prepared right from the start of the mortgage application process.

This guide will answer the question, “what is LTV?” and provide details about the required loan-to-value ratios for different kinds of loans that you’ll choose from when you explore financing options.

What Is a Loan-to-Value Ratio (LTV)?

LTV ratio refers to the percentage of the value of your home you're allowed to borrow when you get a mortgage loan. For example, if a mortgage has a max LTV of 80%, that means lenders can only loan you up to 80% of the appraised value of the home.

It's important to know how to calculate loan-to-value ratio because lenders are limited by what they can legally lend you by a maximum loan balance based on the market value of your house and the loan’s LTV.

While you can find a loan-to-value calculator online to help with this calculation, it's easy to determine your loan-to-value ratio yourself -- if you know the home’s market value and the amount you plan on borrowing with a mortgage. Just divide your desired mortgage amount by the amount your home is worth.

If you want to buy a home worth $500,000 and you plan to borrow $400,000, you'd divide $400,000 by $500,000. You'd have an 80% LTV ratio.

Why LTV Matters

Mortgage lenders use LTV to help determine how much loan you qualify for. Some mortgages require your LTV to be no greater than 80% while others allow a higher loan-to-value ratio. Many mortgages that allow a higher loan-to-value ratio require mortgage insurance.

A lower LTV is always preferable because the lower the LTV, the less risk is involved in loaning money. A lower loan-to-value ratio reduces the chances of loss on the mortgage. This is why mortgage insurance is required on loans with low down payments and high LTV ratios (except for VA loans).

Additionally, because homeowners with lower LTVs have more equity in their homes, they typically qualify for lower rates and better terms when they buy a home or refinance. As a result, your LTV ratio, plus other factors, can affect if you get a mortgage and how much you save when you pay for it.

How to Calculate Loan-to-Value Ratio

Calculating your LTV ratio is simple. Here's the formula:

• Loan amount ÷ appraised value

Dividing the loan amount by the appraised value allows you to know how much money you are borrowing in comparison to what the home is worth.

When lenders calculate LTV for a mortgage, they use your home's appraised value. This is not always the same as your purchase price. The appraised value is determined by a professional appraiser who inspects your home and then looks at comparable properties to determine what your home is worth given its features and current market conditions.

Loan-to-Value Ratio Example

Let’s say you want to buy a home for $300,000 and make a down payment of $20,000. This means you’ll need a mortgage for $280,000. The LTV would be:

• $280,000 ÷ $300,000 = .93 or 93%

However, because mortgage companies require a home appraisal and use the appraised value, which can differ from the amount agreed to purchase the home for. If your appraisal states that the home is worth only $290,000, the LTV calculation changes to:

• $280,000 ÷ $290,000 = 0.965 or 96.5%.

If your mortgage requires a maximum LTV lower than 96.5%, you may need to increase your down payment or renegotiate the price with the seller to reduce the sales price to meet your mortgage requirements.

LTV Amounts by Loan Types

So, what is a good LTV ratio, and what will different lenders allow? The table below provides information on the maximum loan-to-value ratios for different kinds of loans.