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What is loan-to-value ratio?

Your LTV is important when you want a mortgage

Loan-to-value ratio (or "LTV") is a percentage calculated by dividing your mortgage by the value of your home.

Freedom Mortgage uses LTV to help determine whether you qualify for a loan. For example, some mortgages require your LTV to be no greater than 80% if you want to qualify for that loan.

We also use loan-to-value ratio to measure a mortgage’s risk. Customers with lower LTVs have more equity in their homes, are considered less likely to default, and may qualify for lower rates or better terms when they buy or refinance a home. As a result, your loan-to-value ratio, plus other factors, can affect whether you get a mortgage and how much you pay for it.

How to calculate a mortgage's loan-to-value ratio

When we calculate LTV, we use your home's appraised value. It’s important to understand the appraised value is not always the same as your purchase price.

For example, let's say you want to buy a home for $300,000 and make a down payment of $60,000. This means you will need a mortgage for $240,000. Take the mortgage amount and divide it by the sale price to get the loan-to-value ratio. That is:

$240,000 ÷ $300,000 = .08 or 80%

However, most mortgage companies require a home appraisal before they will approve your mortgage. Let's say your appraisal states the home is worth only $290,000. That means the loan-to-value calculation is now $240,000 ÷ $290,000 = 0.83 or 83%.

If your mortgage requires a maximum LTV of 80%, you may need to increase your down payment or re-negotiate the price with the seller.

Loan-to-Value Ratio (LTV) Calculator

Use our calculator to estimate your loan-to-value ratio. Enter your home’s value and your mortgage amount to calculate your LTV!

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This LTV calculator is made available as a self-help tool for your personal use. We do not guarantee its accuracy or applicability to your individual circumstances. Resulting calculations are for illustrative and informational purposes only and are not intended as investment or financial advice. Consult a qualified financial advisor before making important personal finance decisions. To get a better understanding your loan-to-income ratio, speak with a loan advisor at Freedom Mortgage.

Your LTV is
80%

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How does your down payment affect your mortgage's loan-to-value ratio?

When you make a larger down payment, your loan-to-value ratio decreases. When you make a smaller down payment, your loan-to-value ratio increases.

Let’s look at the previous example again where your LTV was 83%. If your mortgage requires a loan-to-value ratio no higher than 80%, one way to qualify for the mortgage is to increase your $60,000 down payment as shown below.

Sale price	$300,000
Appraised value	$290,000
Maximum mortgage amount (80% LTV)	$232,000 ($290,000 x 0.8)
New down payment amount	$68,000 ($300,000 - $232,000)
New LTV	80% ($232,000 ÷ $290,000)

In this case, you can see that increasing your down payment to $68,000 lowers your LTV to 80% and might help you qualify for the mortgage.

Another way to lower your loan-to-value ratio to 80% in this example is to ask the seller to reduce the price of their house to $290,000. This can be hard to do in a "seller’s market" where you are competing with other buyers for the same house, however. In fact, you might have to bid over the sale price, which can increase your down payment. Look at one more calculation.

Sale price	$320,000
Appraised value	$290,000
Maximum mortgage amount (80% LTV)	$232,000 ($290,000 x 0.8)
New down payment amount	$88,000 ($320,000 - $232,000)
New LTV	80% ($232,000 ÷ $290,000)

In this case you can see that raising the sale price by $20,000 also increased the down payment by $20,000 to keep the loan-to-value ratio at 80%. When buying a house, keep in mind both your loan-to-value ratio and down payment amount!

What is a good LTV for a mortgage?

Lenders often see loan-to-value ratios of 80% and below as good. A good LTV can help you get a better rate on your loan. When you are buying a home with a conventional loan, having an 80% LTV or less can help you avoid paying for private mortgage insurance (PMI). When you are refinancing a home, a good LTV can make it easier to get your refinance approved.

Do you need an 80% loan-to-value ratio to buy a house?

No. Many times you can buy a home with a loan-to-value ratio greater than 80%. For example, you may qualify for a conventional loan with an LTV as high as 90% to 95%. You will pay for private mortgage insurance (PMI) until you get to 80% LTV, however.

When you buy a home with an FHA loan, you may qualify for a mortgage with an LTV as high as 97.5%. When you buy a home with a VA loan, your loan-to-value ratio can be as high as 100% -- that is, you are not required to make a down payment. Note that these loans come with mortgage insurance premiums or fees you’ll need to pay.

Can your loan-to-value ratio affect your mortgage interest rate?

Yes. Lenders often consider loans with a higher LTV riskier than loans with a lower LTV. As a result, lenders may charge higher interest rates on mortgages with higher LTVs and lower interest rates on mortgages with lower LTVs.

What is combined loan-to-value ratio?

A combined loan-to-value ratio (CLTV) is calculated when you have more than one loan on your property, like a home equity loan or line of credit, in addition to your mortgage.

Does LTV affect mortgage refinancing?

Freedom Mortgage may also look at your loan-to-value ratio when you refinance. This is particularly true when you want to tap into your home’s equity with a cash out refinance. That’s because your cash out refinance LTV affects how much money you can borrow from your home’s equity. When you refinance, we will mostly likely ask for a new appraisal to determine your home’s current value.

Last reviewed and updated April 2023 by Freedom Mortgage Corporation.