What is a loan-to-value ratio and how is it calculated?

Most homebuyers don’t pay cash for their home, they finance it with a loan. However, most lenders won’t allow buyers to finance the entire purchase price of the home. Usually, the buyer must have a down payment.

The amount of the purchase price you’re allowed to finance, and the amount you need to put down, depends on many factors, including the loan type and value of the property.

The amount you borrow in relation to the value of the property is known as the loan-to-value ratio (LTV). This is expressed as a percentage of the total home price. The LTV ratio is just one of the factors used in loan approvals, alongside variables like your income and credit score.

What is a loan-to-value ratio?

The LTV shows how much of a home’s value you can borrow with a mortgage. Think of it as the inverse of your down payment: If a lender requires an 80% LTV, that means you can borrow 80% of the home’s value and need to cover the remaining 20% with your down payment. You can use Rocket Mortgage's down payment calculator to estimate the impact of your down payment on your loan.

Lenders commonly use LTV ratio to determine a borrower’s eligibility for a loan. The higher the LTV ratio, the more risk to the lender. The lower a borrower’s LTV is, the less risk there is for the lender.

LTV vs. combined LTV

The combined loan-to-value ratio, or CLTV, is used when lenders assess your eligibility for a home equity loan or line of credit. Think of it as a version of the LTV, except it factors in other loans that use your home as collateral. Whereas the LTV looks only at your mortgage, the CLTV looks at your mortgage and any home equity loans or HELOCs you have on your home.

What is a good LTV?

While specific loan types and lenders set a maximum LTV, the lower your LTV is, the better. A lower LTV means you’re putting down a larger down payment, and you need to borrow less to buy the home.

A lower LTV also can help you avoid paying for private mortgage insurance (PMI), which is required on conventional loans with an LTV higher than 80%.

LTV example

Say you’re buying a home for $420,000 with a 30-year fixed-rate conventional loan.¹ The maximum LTV for this loan is 97%, which means you can borrow 97% of $420,000, or $407,400. You’ll need a down payment of $12,600 and will generally have to pay for PMI until you have 20% equity in your home.

If you can come up with 20% down, which is $84,000, your LTV drops to 80%, and you can avoid paying for PMI.

How to calculate your LTV

If you’re buying a home, calculate the LTV by subtracting your down payment from the purchase price, dividing the result by the purchase price, and multiplying by 100 to get a percentage.The formula is simpler than it sounds. Here’s what it looks like:

LTV ratio = purchase price - your down payment / purchase price x 100.

Here’s an example of the formula in action: If you have $25,000 for a down payment and you’re buying a home for a purchase price of $350,000, your LTV is $325,000 divided by $350,000, which comes out to 92.9%.

If you’re refinancing, calculate the LTV by dividing your new loan amount by your home’s current market value. For example:

LTV ratio = new loan amount / current market value of your house x 100.

Say your home is worth $400,000 and you owe $275,000 on your mortgage, giving you $125,000 in equity. If you do a cash-out refinance of your home because you’d like to consolidate debt at a higher interest rate or make a large purchase with a new loan amount of $350,000, that will equal an LTV of 87.5%. It would also leave you with $75,000 in cash. You can use Rocket Mortgage's home equity calculator to estimate your equity.

LTV rules by loan type

What’s considered an acceptable LTV varies by loan type. In most cases, government home loans allow higher LTVs than conventional mortgages.

Conventional loans

The LTV on a conventional loan can be as high as 97% for a fixed-rate conforming loan. The maximum LTV is 95% for an adjustable-rate mortgage. If your LTV exceeds 80%, you must pay PMI until you have 20% equity in your home.

Federal Housing Administration loans

FHA loans are for borrowers who may not qualify for a conventional loan because their credit score is low. FHA loans have a maximum LTV of 96.5% with a minimum credit score of 580 and an LTV of 90% if your credit score is 500 to 579.

Veterans Affairs loans

VA loans ² are available only to active-duty military personnel, veterans, and their surviving spouses. There’s no down payment required, so the maximum LTV is 100%. It can go even higher if the borrower needs additional financial assistance.

U.S. Department of Agriculture loans

Like VA loans, the LTV on USDA loans can be as high as 100%. However, to qualify for a USDA loan, you must have a low-to-moderate household income, based on your area, buy a home in a rural area, and meet certain credit criteria.

Fannie Mae HomeReady loans

Loans offered through this Fannie Mae program ³ allow you to take out a mortgage with an LTV of 95% – 97%. That means your down payment can be as little as 3% if you qualify for certain programs. Fannie Mae loans are conforming loans.

Freddie Mac Home Possible loans

This Freddie Mac loan program ⁴ requires a maximum LTV of 97%. This means, if you qualify through their Home Possible program, your down payment could be as low as 3%. Importantly, you will have to pay private mortgage insurance (PMI).

How to lower your LTV

There are many ways to lower your LTV, including making a larger down payment and buying a less expensive home.

Make a larger down payment

The larger your down payment, the less you need to borrow and the lower your LTV. To see the impact a larger down payment can have on your monthly payment, use our mortgage calculator.

Find a more affordable home

Your down payment will cover more of the price of a cheaper home, reducing your LTV. To find a more affordable home, consider lowering your maximum budget, looking at homes in different neighborhoods, or putting in lower offers on homes.

The bottom line: A lower LTV helps you get a loan

The LTV ratio is one of the most important factors lenders use in the mortgage approval process. It tells them how much of a home’s value you're financing compared to how much equity you have (if refinancing) or will have (if you’re buying) in the property.

Typically, a lower LTV reduces the lender’s risk and therefore helps you qualify for better terms and lower rates and costs. Different loan programs have different LTV requirements, however, so understanding how they work and how to calculate yours is vital.

When you’re ready to explore your homebuying options, you can apply for a mortgage with Rocket Mortgage.

¹ Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

² Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

^3,4 Client will receive a 1 point (1.000) loan level price adjustment (LLPA) credit on HomeReady and Home Possible purchase loans locked on or after January 2, 2024. One point (1.000) is equal to 1% of the loan amount. Minimum credit amount will be $2,000. Maximum loan amount is $350,000. Offer is not available with any other discounts or promotions. Offer cannot be retroactively applied to previously closed loans or loans already in process; offer is not transferable. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply. This is not a commitment to lend.