Loan-to-Value Ratio (LTV)
Loan-to-value ratio (LTV) is the percentage of a property's appraised value that is financed by a mortgage. It is calculated by dividing the loan amount by the appraised value or purchase price, whichever is lower. LTV is a primary factor in underwriting decisions, interest rate pricing, and mortgage insurance requirements.
What This Means
Calculating LTV
LTV is expressed as a percentage: divide the mortgage amount by the lesser of the appraised value or the purchase price, then multiply by 100. A borrower purchasing a home appraised at $400,000 with a $360,000 mortgage has an LTV of 90%. The remaining 10% represents the borrower's equity or down payment.
For refinances, LTV uses the current appraised value rather than the original purchase price. Combined loan-to-value (CLTV) accounts for all liens against the property, including second mortgages and HELOCs.
LTV Thresholds and Their Impact
LTV directly affects loan eligibility, pricing, and insurance requirements:
- 80% LTV or below - Conventional loans typically do not require private mortgage insurance (PMI) at or below this threshold
- Above 80% LTV - Conventional loans require PMI, which adds to the monthly payment until the borrower reaches 20% equity
- 96.5% LTV - Maximum for FHA loans with a minimum 3.5% down payment for borrowers with credit scores of 580 or higher
- 100% LTV - VA and USDA loans allow financing with no down payment for eligible borrowers
Why LTV Matters
Lenders view lower LTV ratios as less risky because the borrower has more equity at stake. Higher LTV loans carry greater risk of loss if the borrower defaults and the property must be sold. As a result, borrowers with higher LTV ratios typically face higher interest rates, stricter underwriting requirements, and additional insurance costs. Reducing LTV through a larger down payment or choosing a less expensive property can improve loan terms significantly.