Loan-to-Value Ratio (LTV): What It Is and How It’s Calculated
Key Takeaways
- Lower LTV ratios typically help you qualify for better mortgage rates.
- Higher LTV ratios may require mortgage insurance and higher overall borrowing costs.
- Increasing your down payment or home equity helps lower your LTV ratio.
- LTV measures how much of a home’s value you're borrowing with a loan.
Knowing how much you can borrow to purchase or refinance a home plays a big role in determining where you live, the type of home you buy, or what you can do with funds from a refinance. Mortgage lenders consider many factors when determining if you’re eligible for a home loan and how much to lend you, including the loan-to-value ratio (LTV).
In this guide, we’ll explain LTV and provide details about the required loan-to-value ratios for different kinds of loans that you’ll choose from when you explore home financing options.
What Is a Loan-to-Value Ratio (LTV)?
LTV ratio refers to how much of a home's value you’re borrowing when you get a mortgage. For example, if you buy a home with a mortgage that has a max LTV of 80%, the lender can loan up to 80% of the home’s appraised value, and you must provide the remaining 20% as a down payment. In other words, a 20% down payment fills the gap between the home's value and the loan amount.
Your loan-to-value (LTV) ratio is one of the key factors lenders use when evaluating your mortgage application. It helps determine how much you can borrow, whether you'll need mortgage insurance, and the interest rate and loan terms you may qualify for.
A lower LTV generally means less risk for the lender and you, because you're borrowing a smaller percentage of the home's value and have more equity invested in the property. As a result, borrowers with lower LTVs often qualify for better interest rates and loan terms.
How LTV Impacts Your Home Loan
A lower LTV generally benefits you because it means:
- You may qualify for more loan options. Some mortgage programs require an LTV of 80% or less, while others allow much higher LTV ratios.
- You may avoid mortgage insurance. Conventional loans with an LTV above 80% typically require private mortgage insurance (PMI), which increases your monthly housing costs.
- You may receive better rates and terms. Borrowers with lower LTVs are often offered lower interest rates because they represent less risk to lenders.
- You may qualify for better refinancing opportunities. Homeowners with lower LTVs have more equity in their homes, so they can typically secure lower rates and better terms when refinancing.
Ultimately, your LTV ratio can have a big impact on your mortgage costs and borrowing options. While lenders consider other factors such as your credit score, income, and debt-to-income ratio (DTI), maintaining a lower LTV can help you save money over the life of your mortgage.
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How to Calculate Loan-to-Value Ratio
Calculating your LTV ratio is simple. Here's the formula:
- Mortgage loan amount ÷ appraised property 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 set by a professional appraiser who inspects your home and reviews comparable properties to determine its value based on 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 $20,000 down payment. This means you’ll need a $280,000 mortgage. The LTV would be:
- $280,000 ÷ $300,000 = .93 or 93%
However, lenders base the LTV calculation on the appraised value from a home appraisal, not necessarily the purchase price. If your appraisal determines the home is only worth $290,000, the LTV calculation changes to:
- $280,000 ÷ $290,000 = 0.965 or 96.5%.
If your mortgage requires a maximum LTV below 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
Different mortgage programs have specific LTV caps, and the table below shows the maximum loan-to-value ratios for different loan types.
| Type of Mortgage | Maximum allowed LTV |
| VA loan | 100% |
| FHA loan | 97.5% |
| USDA loan | 100% + more to cover closing costs |
| Conventional loan | Varies by lender, potentially as high as 97% |
Loan-to-Value Ratio (LTV) Calculator
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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How to Lower Your LTV
Lowering your loan-to-value ratio can help you qualify for more loans with better rates, giving you the benefit of lower monthly payments.
Here are some ways to reduce LTV and make your loan more affordable.
Make a Larger Down Payment
When you make a larger down payment, your LTV 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 96.5%. If lowering your LTV to 85% would help you qualify for a lower mortgage rate, one option is to increase your $20,000 down payment, shown here:
| Sale price | $300,000 |
| Appraised value | $290,000 |
| Maximum mortgage amount (85% LTV) | $232,000 ($290,000 x 0.85) |
| New down payment amount | $53,500 ($300,000 - $246,500) |
| New LTV | 85% ($246,500 ÷ $290,000) |
A much larger down payment also greatly reduces your monthly mortgage payments because you borrow significantly less principal.
Find a Less Expensive Home
Finding a less expensive home can help you get a lower LTV ratio if you keep your down payment the same.
If you were going to put down $50,000 on a $250,000 home, your LTV ratio would be 80% ($200,000/$250,000). But if you put the same $50,000 on a $200,000 house, your ratio would be 75%.
Loan-to-Value Ratio FAQs
Here are answers to some frequently asked questions about loan-to-value ratios.
What Is a Good LTV for a Mortgage?
Lenders often consider a loan-to-value ratio of 80% or lower to be good. A good LTV can help you get a better rate on your loan. When you're 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’re refinancing a home, a good LTV can make it easier to get your refinance approved at the lowest-possible mortgage rate.
Do You Need an 80% Loan-to-Value Ratio to Buy a House?
Some lenders require an 80% loan-to-value ratio to buy a house, but not all do. Conventional loans allow lenders to qualify customers with LTV ratios as high as 97%, while an FHA loan allows up to a 96.5% ratio, depending on your credit score, and both VA loans and USDA loans allow up to a 100% loan-to-value ratio.
If your ratio is above 80%, you'll usually have to pay slightly higher upfront fees and/or ongoing costs for mortgage insurance or both.
Can Your Loan-to-Value Ratio Affect Your Mortgage Interest Rate?
Yes, your LTV affects your qualifying mortgage interest rate. Lenders are generally able to offer lower interest rates on loans with lower LTVs. 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 a Combined Loan-to-Value (CLTV) Ratio?
A combined loan-to-value ratio (CLTV) is calculated when you have more than one loan on your property, such as a home equity loan or home equity line of credit (HELOC), in addition to your mortgage. Lenders consider your combined loan-to-value ratio when evaluating your mortgage loan application.
Does LTV Affect Mortgage Refinancing?
Lenders look at your loan-to-value ratio when you refinance, particularly when you want to tap into your home’s equity with a cash-out refinance or a HELOC. That’s because your cash-out refinance LTV affects how much money you can borrow from your home’s equity. When you refinance, lenders will most likely require a new appraisal to determine your home’s current market value.
Final Thoughts: What Your LTV Means for Your Mortgage
Because your LTV ratio can affect everything from your mortgage rate to your mortgage insurance requirements, it's one of the most important numbers to know when shopping for a home loan. We can help you understand (and potentially improve) your LTV. So, when you’re ready to take the next step, get prequalified with Freedom Mortgage to explore your loan options.
Christine Rakoczy has been a financial writer since 2008, contributing to major publications, including Credit Karma, CBS MoneyWatch, WSJ, and Forbes Advisor. While her special focus is diving deep into mortgages, Christine has extensive experience with all types of financial topics.
In addition to writing for online articles, Christine has also taught business administration courses at a career college and has served as a subject matter expert on numerous business and legal courses.
Christine earned her JD from UCLA School of Law in 2008 and has a BA in English, Media, and Communications, with a Certificate in Business Administration from the University of Rochester.
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