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Loan-to-Value Ratio (LTV): What It Is and How It’s Calculated

Why LTV Is Important When You Want a Mortgage

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.

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

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

All fields are required.

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
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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. This gives you the benefit of lower monthly payments.

Here are some ways you can reduce LTV to 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 you will enjoy a lower mortgage rate if you can lower your LTV to 85%, one way 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

Now you know the loan-to-value ratio definition and have seen an LTV ratio example.

If you want to learn more, here are the answers to some frequently asked questions about how your loan-to-value ratio works.

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 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’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 loanallows up to a 96.5% ratio, depending on your credit score, and both VA 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?

Your loan to value can affect your mortgage interest rate. Lenders are allowed to offer their lowest interest rates to 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 line of credit, 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. 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 value.

Final Thoughts: How Your LTV Affects Your Homebuying Budget

Your loan-to-value ratio is an important metric when you're applying for a mortgage loan that saves you the most money. If you are ready to explore your loan options, reach out to Freedom Mortgage today to find out how much you can save with a lower rate and to get started on the mortgage prequalification process today.