What Is Loan-To-Value Ratio (LTV) And How Is It Calculated?

*As of July 6, 2020, Rocket Mortgage^® is no longer accepting USDA loan applications

When you apply for a mortgage, lenders look at several factors, including your loan-to-value ratio, or LTV. It looks at the amount you can borrow when you purchase a home and lenders frequently use it to assess your risk as a borrower.

Let’s take a closer look at the loan-to-value ratio, why it matters and how you can calculate yours.

LTV Meaning

Your loan-to-value (LTV) ratio compares the size of the loan you’re applying for to a home's value. Lenders commonly use the loan-to-value ratio in real estate transactions to determine a borrower’s eligibility for a loan.

In other words, your LTV looks at the home's appraised value and compares it against the size of the mortgage you want to borrow. Lenders use the LTV when assessing you for a mortgage to see the type of risk it may be taking on.

The LTV ratio also determines the size of the down payment that's necessary when you're buying a home and the amount of equity you must have to refinance.

LTV Vs. Combined LTV

The combined loan-to-value ratio (CLTV) is a factor used by lenders when assessing you for a home equity loan or HELOC. Think of it as a version of the LTV, except it takes into consideration your other loans that use your home as collateral. Whereas the LTV only looks at your mortgage, the CLTV looks at your mortgage and any home equity loans or home equity lines of credit (HELOCs) you may already have. 

What Is A Good Loan-To-Value Ratio?

In general, a good LTV hovers around 80% or less. At this range, lenders may be more willing to offer you a conventional home loan and at more competitive rates. You may also be able to avoid private mortgage insurance with conventional loans, which could save you thousands of dollars.

For higher LTVs, it’s still possible to qualify for a loan, though conventional mortgage lenders may offer higher rates. However, there are government-backed mortgages like FHA and VA loans that you can qualify for at higher LTVs as long as you can meet their other borrower requirements.

Why LTV Matters In The Mortgage Process

Your LTV is one way lenders can assess the risk you might be as a borrower, or how likely you are to afford and pay back the mortgage. The lower your loan-to-value ratio, the less of a risk you present to mortgage lenders. A lower LTV can improve your chances of qualifying for more favorable rates and terms, whether you take out a mortgage or refinance one.

Keep in mind LTV requirements may differ by the lender and can impact other aspects or your loan like the minimum down payment amount you’ll need to make.

Loan-To-Value Ratio Example

Say you’re purchasing a home that’s valued at $390,000 and your lender is willing to lend you up to $351,000. That’s at a 90% loan-to-value ratio. You can make a down payment of $39,000, or higher, if you want to avoid paying private mortgage insurance.

How To Calculate Your Loan-To-Value Ratio

To calculate your loan-to-value ratio, take the total loan amount of the home and divide it by its appraised value. When you refinance a home, you can calculate the LTV by dividing the refinance loan amount by your home's market value. In either case, you take the result of that calculation and multiply it by 100 to get a percentage, or the LTV ratio.

For example, say you want to purchase a home that's appraised at $400,000 and the lender offers you a loan amount of $320,000. When you divide $320,000 by $400,000 and then multiply it by 100, you get an LTV ratio of 80%.

LTV Ratio Rules By Loan Type

What’s considered an acceptable loan-to-value ratio will differ based on the type of loan you want to borrow or refinance. In most cases, government-backed loans allow higher LTV ratios compared to conventional mortgages.

• Conventional loans: When applying for conventional loans, lenders typically want you to have a LTV of 80% or less. If it’s slightly higher it may be fine, but you’re more likely to pay PMI and face less than ideal loan terms.
• FHA loans: This type of loan is backed by the Federal Housing Administration and usually has more lenient borrower requirements. That's because these loans tend to be geared toward lower-income home buyers. FHA loans require an LTV of up to 96.5%, though if your credit score is less than 580, your LTV requirement goes down to 90%.
• VA loans: VA loans are backed by the Department of Veterans Affairs (VA) and are for qualifying veterans, active-duty service members and their families. In many cases, the LTV requirements for these loans can reach 100% or even higher, depending on if the borrower needs additional financial assistance. 
• USDA loans: Similar to VA loans, USDA loans have LTV requirements that can reach as high as 100%.
• Fannie Mae’s HomeReady program: Loans offered through this Fannie Mae program allow you to take out a mortgage with LTVs ranging from 95% – 97%.
• Freddie Mac’s Home Possible loan: This Freddie Mac loan program requires maximum LTVs that can range from 80% – 105% depending on your financial situation.

How To Lower Your LTV

There are several best practices you can follow to lower your loan-to-value ratio, including making additional loan payments and finding a more budget-friendly home.

Make A Large Down Payment

The higher your down payment, the less you need to borrow, hence a quicker way to lower your LTV. Of course, it’s not always possible to save up for a larger down payment, but any additional amount you can save will help.

To see the impact it could have on your monthly mortgage payment if you put down a larger down payment, use our mortgage calculator.

Find A More Affordable Home

Shopping around for a lower-priced home can help you when you can afford a larger down payment. In other words, your dollars will stretch further when it comes to your down payment amount, even if you keep it the same.

To find a more affordable home, consider lowering your maximum budget, looking at homes in different neighborhoods, or put in offers for homes to lower amounts.

Make Principal Payments

If you want to refinance your home, making principal-only payments can help you lower the amount you need to borrow.  That way, you will be able to lower your LTV and hopefully qualify for a loan with more competitive rates and terms. If you make regular payments though, the amount may go toward the interest on your current loan. Be sure to check before submitting your payment.

The Bottom Line

Your loan-to-value ratio is a crucial factor in how lenders evaluate your risk as a borrower. It helps lenders to see how much you need to borrow compared to the home’s appraised value. In many cases, the lower your LTV, the more likely you’re seen favorably by lenders. As such, you could be offered loans at lower interest rates, which would save you tens of thousands throughout your loan.

Ready to look for a home? It’s easy to start the mortgage process today with Rocket Mortgage® and find out what you may qualify for, as well as your loan options.