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

October 12, 2009
What Is the Loan-to-Value Ratio? (LTV)

Mortgage basics: “What is the loan-to-value ratio?”

If you’re currently shopping for a home loan or going through the mortgage process, chances are you’ve heard the phrase loan-to-value ratio get thrown around on more than one occasion.

You may have also encountered the acronym “LTV” while reading all those stories about negative equity and underwater homeowners that dominated the newspaper headlines over the past several years.

Regardless of what’s going on in the housing market, you should know this important term when applying for a mortgage to ensure you get the best deal as it can greatly affect mortgage rate pricing, refinance options, and overall loan eligibility.

How to Calculate the Loan-to-Value Ratio (LTV)

loan to value ratio

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  • It’s actually one of the easiest calculations you can make
  • Simply divide the loan amount by the appraised value
  • And you’ll get a percentage known as your LTV
  • The tricky part might be agreeing on a home value

Put simply, the loan-to-value ratio, or “LTV ratio” as it’s more commonly known in the industry, is the mortgage loan amount divided by the lower of the purchase price or appraised value of the property.

If we’re talking existing mortgages (in the case of refinance loans), it’s the outstanding loan balance divided by the appraised value.

When calculating it, you will wind up with a percentage. That percentage is your LTV.

It’s actually very easy to calculate (no algebra required) and takes just one step. You don’t even need a mortgage calculator. In fact, you might be able to run the numbers in your head. Honest!

Let’s calculate a typical LTV ratio:

Property Value: $500,000
Loan Amount: $350,000
Loan-to-value Ratio (LTV): 70%

In the above example, we would divide $350,000 by $500,000 to come up with a loan-to-value ratio of 70%.

Using a basic household calculator, not a so-called “LTV calculator,” simply enter in 350,000, then hit the divide symbol, then enter 500,000. You should see “0.7,” which translates to 70% LTV. That’s it, all done!

This means our hypothetical borrower has a loan for 70 percent of the purchase price or appraised value, with the remaining 30 percent the home equity portion, or actual ownership in the property.

LTV ratios are extremely important when it comes to mortgage rate pricing because they represent how much skin you have in the game, which is a key risk factor.

A Lower LTV Ratio Means More Ownership, Better Rate

  • The lower your LTV
  • The more home equity or down payment you have
  • Which is another way of saying ownership
  • A low LTV equates to a lower mortgage rate

Essentially, the lower the loan-to-value ratio, the better, as it means you have more ownership (home equity) in the property.  Someone with more ownership is less likely to fall behind on payments or foreclose, seeing that they have a greater equity stake, aka financial interest to keep paying the mortgage each month.

Not only that, but banks and mortgage lenders also set up pricing adjustment tiers based on the LTV ratio.  Those with lower LTV ratios will enjoy the lowest interest rates available, while those with high LTVs will be subject to higher closing costs and rates.

For example, if you’re being hit for having a less-than-stellar credit score, that adjustment will grow larger as the loan-to-value ratio increases (higher LTV ratio = greater risk).

So if your mortgage rate is bumped a quarter of a percent higher for a loan-to-value ratio of 80%, that same pricing hit may be increased to a half percentage point if the LTV ratio is 90%.

This can certainly raise your interest rate in a hurry, so you’ll want to look at all possible scenarios with regard to down payment and loan amount to keep your LTV ratio as low as possible.

More importantly, just maintain an excellent credit score and you’ll have plenty of loan options, regardless of down payment or home equity.

80% LTV Is a Very Important Threshold!

  • Keeping your mortgage at/below 80% LTV
  • Is extremely important
  • Not only to secure a lower mortgage rate
  • But also to avoid private mortgage insurance

Most borrowers (who are able to) elect to put 20% down when buying a home, as it allows them to avoid mortgage insurance and the much higher pricing adjustments often associated with LTVs above 80%.

But you don’t necessarily need to put 20% down to enjoy the benefits of a low-LTV mortgage.

Looking at the above example again, if you were to raise the first mortgage amount to $400,000 and add a second mortgage of $50,000, the combined loan-to-value ratio, or CLTV as its known, would be 90%.

Let’s do the math here; again, no mortgage calculator required!

Simple math: $400,000 + $50,000 = $450,000 / $500,000 = 90% CLTV

You would have a first mortgage at 80% LTV, and a second mortgage for an additional 10% LTV, making the CLTV 90%.

Sometimes borrowers elect to break up home loans into a first and second mortgage, known as combo mortgages, to keep the loan-to-value ratio below key levels, thereby reducing the interest rate and/or avoiding private mortgage insurance.

Keep in mind that banks and mortgage lenders have both LTV and CLTV limits, meaning they won’t allow homeowners to borrow more than say 80, 90, or 100 percent of the property value (these limits have come down since the mortgage crisis got underway but are creeping back up again).

Max LTV by Loan Type

  • FHA loans go as high as 96.5% LTV
  • Conforming loans go as high as 97% LTV
  • USDA and VA loans go to a full 100% LTV
  • Jumbos, cash-out refis, and investment properties are much more restricted
  • No maximum LTV for certain streamline refinances

There are certain LTV limits based on loan type, with conventional loans (non-government) typically being more restrictive than government loans. And refinance programs often less accommodating than home purchase ones.

At the moment, you can get an FHA loan as high as 96.5% LTV, which is just 3.5% down payment.

You can get a conventional loan as high as 97% LTV, which at just 3% down is higher than it used to be. In recent history, the maximum was 95% LTV, but now Fannie Mae and Freddie Mac are competing directly with the FHA.

[See FHA vs. conventional for more on that.]

You can get either a VA loan or USDA loan at 100% LTV (which represents no money down). These are the most flexible loan programs LTV-wise, but they are also only available to veterans or those living in rural areas, respectively. So not everyone will qualify for these types of mortgage loans.

There are also special home buying programs from various private mortgage lenders that allow for 100% LTV financing if you take the time to shop around.

If it’s a jumbo, a cash-out refinance, or an investment property, the loan-to-value will be a lot more limited, potentially capped at just 70-80% LTV, depending on all the attributes.

And finally, those underwater or upside down borrowers you hear about; they owe more on their mortgage than the property is currently worth.  This can happen due to negative amortization and/or home price depreciation.

A quick underwater loan-to-value ratio example:

Property Value: $400,000
Loan Amount: $500,000
Loan to Value Ratio (LTV): 125%

As you can see, the underwater borrower has a LTV ratio greater than 100% (this equates to negative equity), which is a major problem from a risk point of view.

The problem with homeowners in these situations is that they have little incentive to stick around, even with a modified mortgage payment, as they’re so far in the red that there’s little hope of recouping home value losses.

However, it just so happens that the Home Affordable Refinance Program (HARP) allows loan-to-values up to 125 percent.  And now there’s no LTV limit thanks to a recent revision!

So there are options to refinance and get a lower interest rate, as long as your loan is owned by Fannie Mae or Freddie Mac, no matter the mortgage balance relative to the property value.

Same goes for FHA loans and VA mortgages thanks to the FHA streamline refinance and the VA IRRRL option.

Despite being far behind new homeowners entering the market in terms of building equity, many of these formerly underwater borrowers now have lots of equity thanks to years of home price appreciation and years of paying down their mortgages.

That’s why you have to consider the long-game in real estate and never give up, even when times get tough. This also illustrates why home buying shouldn’t be a quick or hasty decision.

A Lower Loan-to-Value Can Save You Money!

  • A lower LTV generally means a lower interest rate
  • Which can save you money month after month
  • And put more of your hard-earned dollars toward the principal balance
  • Potentially saving you thousands over the life of the loan!

If your LTV is higher than you’d like it to be, there are some options to lower it. Doing so may result in a more favorable mortgage rate, the ability to avoid private mortgage insurance, and expanded loan program eligibility, all of which can save you money.

Borrowers Can Reduce Their LTV in a Variety of Ways

  • Come in with a larger down payment if it’s a home purchase loan
  • Get gift funds to increase your down payment
  • Or break your loan up into (combo loan)
  • Make extra payments or a lump sum payment for a refinance to get the LTV down before you apply
  • Or simply wait for home price appreciation to lower your LTV over time

If it’s a home purchase, simply bring in more down payment money and the LTV will be lower. Easier said than done, sure, but possible for some. Perhaps someone will gift you the money or act as a co-borrower? Or as noted, simply break up your financing into two loans.

If it’s a mortgage refinance, simply pay down the mortgage balance a bit more before you apply, whether on schedule or by making extra mortgage payments. This can be especially helpful if you’re super close to a certain LTV threshold, or just above the conforming loan limit.

Finally, there’s another way existing homeowners can get their LTV down and it requires no effort whatsoever. You don’t have to do anything except sit back and watch your house value increase over time, thereby lowering your LTV in the process. Of course, the opposite can happen too if home values drop!

But as noted, real estate should be treated with a long time horizon, so be sure you have the ability to ride the ups and downs and make moves when it’s most favorable to you.

Read more: 10 ways to build home equity.


26 Comments

  1. Colin Robertson December 28, 2017 at 9:54 am -

    Lisa,

    The 30-year fixed is pricing around 4%-4.125% at the moment, so it doesn’t seem that out of the ordinary, even though you’re putting a lot down and have stellar credit. You may want to go through all the fees, points, and so on to see how they got to that number.

  2. Lisa Chung December 28, 2017 at 8:49 am -

    I’m purchasing a new home from DR Horton. I’m placing $116k down on $289.99k purchase. Loan $174k. The loan is in my father’s name and title in both of our names. APR 30 yr fixed is 4.21% with 801 credit score. I’m also a real estate broker. Does this APR seem high to you?

  3. Colin Robertson April 6, 2017 at 8:54 am -

    Thad,

    Generally LTV is based on lower of sales price and appraised value. Unless it’s a gift of equity, then it’s possible to treat it as part of the down payment, though minimum borrower contribution requirements may still apply.

  4. Thad April 5, 2017 at 10:12 pm -

    If a home is sold for 90% of appraised value, would lenders treat that as if the borrower had made a 10% down payment? Or would lenders typically treat that 90% as the basis for establishing home value and require a down payment over the 10% instant equity?

  5. James September 28, 2016 at 9:24 pm -

    Because it was stated loan w bb&t direct not protected by Fannie Mae or Freddie Mac so Harp does not qualify. Bb&t unwilling to modify without us paying $75k to refinance.

  6. Colin Robertson September 28, 2016 at 2:16 pm -

    James,

    If underwater you can see if you’re eligible for a HARP refinance. If not, maybe a proprietary loan mod with the loan servicer you’re currently with. Good luck.

  7. James September 26, 2016 at 9:26 pm -

    Collin,

    I was swindled into a stated loan and am now underwater by about $70k. Do you know where to go to get in refinanced into a standard loan? We are at 6.25% and want to take advantage of the current rates. Do you know what the max ltv as my only current home. Owe $225 worth $155k .

    My father and I were going into a retirement/investment property and thought instead of him putting 100k down just do 20% to avoid pmi on his and let me use $70k to refinance my home. This frees up enough money for me to then pay his mortgage taxes and insurance and savings lots of interest.

  8. Colin Robertson August 15, 2016 at 3:04 pm -

    KW,

    It sounds like they’re adding those fees to the outstanding loan balance, which seems odd if they’re trying to keep your LTV in a lower tier, such as at 75% or lower. Can they not offer a slightly higher rate and cover those closing costs with a lender credit to keep the LTV down?

  9. KW August 15, 2016 at 2:22 pm -

    We are currently refinancing, but they are telling me since I have LTV of 77% that I will have to come up with $3000 at closing. House appraised at 215K and we owe 160,000, they added 5400 for fees and closing which is making the loan $165400, but now they are saying they are trying to get an exception. Is this normal? What does this mean?

  10. Colin Robertson July 22, 2016 at 3:06 pm -

    Brian,

    If you’re paying points for a given rate, say 3.75%, and your LTV rises from 72% to 80%, there may be higher pricing adjustments at the higher LTV, and thus a higher cost in points to keep that rate of 3.75%. You could ask what interest rate the original point cost would get you at 80% LTV. It might be 4% but at the original cost…

  11. Brian July 22, 2016 at 9:25 am -

    Colin,

    I am going through a refi presently. When the initial call and paperwork was completed, my points fees were 1.875%. We thought the LTV would come in around 72%. However, when the appraisal came back much lower than expected, the LTV came out to 80%. When new paperwork was sent across my fees went up to almost double for points. When I asked why they simply said it was because of the LTV difference. Is this common practice or should I seek another lender for my refi?

  12. Colin Robertson July 18, 2016 at 10:27 am -

    Chris,

    There is a pricing hit for condos above 75% LTV…you can ask for no cost pricing as well and see what rate you wind up with. It may be something like 3.5% but with no cost and perhaps even a partial rebate for some of your closing costs.

  13. Chris July 15, 2016 at 6:32 am -

    Hello Colin,
    Maybe you can help me understand my loan. I am in the process of closing a loan next week with a 3.375% rate. My loan officer stated to me that since my LTV is at 79% they have to charge me points. Plus my house is titled is a condo and not a single family residence.
    The points are .432% of the loan. Originally, I was told no points or origination fess besides the 3rd party fees. I wanted to know if this is a bait and switch or this is normal?
    What are your thoughts on this?
    Thanks.

  14. achia May 12, 2016 at 6:48 pm -

    Hi Colin,
    I have a question about mobile/manufactured homes. I noticed a lot on Zillow in the florida area.
    Example
    $8,000 Price
    Price cut: -$3,500 (4/25)
    Zestimate®: $131,699. If they Zestimate it’s actually worth 131699. How would this work LTV wise?

  15. Colin Robertson March 16, 2016 at 9:53 am -

    Terri,

    A lower LTV indicates less risk meaning more lenders should offer financing…unless you’re talking about a HARP refinance that must be 80% LTV or higher.

  16. Terri Williams March 15, 2016 at 3:16 pm -

    Are there any institutions that will refinance at a ltv ratio of less than 80%?

  17. James January 27, 2016 at 11:05 am -

    If you have that much cash available, you should use it to pay back the bank what they lost on your short sale. That should be considered as bad as a bankruptcy and cut you off for at least 7 years. And people say the banks are the criminals….

  18. James January 27, 2016 at 11:02 am -

    You shouldn’t be spending that much on a new home if you have that much student loan debt. Stay where you are for now and focus on paying off your student loans. You don’t need a new house. You know it’s the right thing to do. If the market tanks again, you’ll have a huge problem.

  19. James January 27, 2016 at 10:57 am -

    In my experience, adding on to your home rarely makes financial sense. You are typically better off moving and buying a larger home. The price you pay per square foot for quality construction to add on is almost always more than what you pay to purchase a home. Unless you hire a really good, high dollar architect and have a home that’s conducive to adding on, enlarged homes often look awkward and can be difficult to resell. If you really love the home you’re in and don’t want to move, find ways to use your space more efficiently. Don’t waste your money adding on.

  20. Bob Austin July 7, 2015 at 3:34 pm -

    We owe 350000 on a Home valued at 460000. Would like to remodel and double the size of the house if not a little more. What are some options to accomplish this.

  21. Colin Robertson June 19, 2015 at 2:28 pm -

    Julie,

    It depends if you want to keep the existing home or if you need to sell to fund the construction loan. You might be able to pull equity from the existing property to fund the construction loan. Might want to sit down with someone well versed in construction loans to weigh all your options.

  22. Julie June 19, 2015 at 1:21 pm -

    Hello I am currently working with an income of 150,000 and looking to purchase a new construction around 360,000 max. I have student loans almost 200,000 but have a very low payment due to the loan forgiveness program and my occupation. Should I sell my house and take the 50,000 equity and put it down on the new house or should I rent out my home for extra income.

  23. Colin Robertson January 28, 2015 at 10:42 am -

    Laura,

    Some waiting periods are shorter with extenuating circumstances, but if that doesn’t apply to you, a portfolio lender might be willing to extend financing. They keep the loans on their own books and are thus willing to originate loans other agencies like Fannie/Freddie won’t. With that size down payment, you’ll hopefully have some options in the private market.

  24. Laura R. January 27, 2015 at 9:09 pm -

    I am 2 1/2 years post short sale and would like to buy another home. I’m looking to purchase home within $400-$500,000 and have about $300,000+ for a down payment. My credit score is 720. With Fannie Mae requirements recently changing requiring a 4 year wait period regardless of LTV, are there any lenders that will accomodate me?

  25. Colin Robertson January 21, 2015 at 11:52 am -

    Hi Sabastian,

    I would take $160,000 (your original loan amount) and subtract $10,000, assuming that $10,000 paid off was toward principal (if not take your current loan balance). That should leave you with a loan balance of $150,000. Then I would divide $150,000 by your new home value of $400,000 and come up with 37.5% LTV. Your dollar amount of equity would be $400,000 – $150,000, or $250,000.

  26. Sabastian Garcia January 21, 2015 at 10:58 am -

    HELLO excellent explanation on this page! I have a question though and I’m hoping you can help me out because I’ve been looking for the answer and haven’t found any info on it…well. Here it is.
    how do you calculate both the dollar amount and percent amount of equity if: you want to buy a house. an you take out a mortgage.

    EX: house cost $200,000 Down payment $40,000
    Loan $160,000
    three years pass: you’ve paid $10,000 off the loan. the house has appreciated by double so..
    house value $400.000
    My Equity as a Dollar amount is??
    MY Equity as a percent is??
    How did you figure those two questions out!??
    thanks a lot!!!!!

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