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.

Loan-to-value ratio (LTV) is a commonly utilized term in real estate. But what is the meaning of LTV exactly, and how does your loan-to-value ratio impact the mortgage lending process?

The short answer is that loan-to-value ratio is a figure that’s frequently used by lenders as a way to assess any risks that might be inherent to lending to you. The loan-to-value ratio is among several factors that determine home mortgage rates. Other considerations include the prime rate, your credit score, the individual lender and the property type.

Here, we’ll take a closer look at what LTV refers to in real estate, how to calculate it and its potential impact on your mortgage.

Your loan-to-value ratio is a figure (expressed in the form of a percentage) that measures the appraised value of a home that you want to buy or refinance against the loan amount that you’re seeking to borrow. It’s commonly used in real estate transactions by lenders to determine your eligibility for a loan.

In effect, your LTV compares the size of the loan that you’re applying for with the value of the home. Lenders use LTV to determine just how much risk they’re potentially taking on if they decide to lend to you – and to figure out which loans that you are eligible for based on the size of your down payment or amount of equity that you have in a home. Put simply: The lower your LTV, the less risky your mortgage will be perceived to be by prospective lenders. Having a low LTV can improve the odds that you’ll be able to obtain a competitive home mortgage.

Loan-To-Value Ratio Vs. Combined Loan-To-Value (CLTV) Ratio

A mortgage’s LTV ratio describes the proportion of the value of the property to the amount of outstanding mortgage balance. Likewise, a property’s combined loan-to-value (CLTV) ratio describes roughly the same calculation, but takes into account the sum total of all loans that have been taken out on the property.

In the latter case, this means having to take into account additional mortgages or loans on a property, like home equity loans and home equity lines of credit (HELOCs). Your mortgage lender will use both LTV and CLTV ratios when deciding if you’re eligible to receive a loan.

To calculate your LTV, all you have to do is divide your total loan amount or outstanding mortgage balance by the most current appraised value for the property and convert to a percentage. For example, if a lender offers you a $150,000 loan on a home that’s appraised at $200,000, you’ll divide $150,000 over $200,000 and multiply by 100 to get your LTV of 75%.

Before deciding whether to extend you a home mortgage loan or assist with refinancing, your lender will consider your LTV. In effect, having to meet lenders’ LTV requirements (which will differ based on individual lender) can impact your interest rates, the size of your down payment, and whether you’ll pay private mortgage insurance (PMI) or not. For purposes of clarity, the lower your LTV, the lower the risk in the eyes of the lender.

Generally, a good LTV to aim for is around 80% or lower. Managing to maintain these numbers can not only help improve the odds that you’ll be extended a preferred loan option that comes with better rates attached. It can also boost your chances of being able to avoid paying mortgage insurance – and potentially being able to save thousands of dollars in mortgage payments.

Although this is ideal, it’s not always possible, particularly for first-time home buyers. It’s possible to qualify for a conventional loan with as little as 3% down.

Should your LTV come in higher than 80%, you’ll likely have to pay extra for private mortgage insurance on a conventional loan. Mortgage insurance basically serves as a form of risk mitigation for lenders that helps protect them in case you default on the loan – and helps provide them with needed reassurance if they opt to take on the risk of lending to you.

What lenders view as an acceptable LTV ratio can differ based on the type of mortgage that you’re getting. Let’s take a look at some variations to the rules that you may want to be aware of.

LTV Ratio For FHA Loans

FHA loans, which are mortgages backed by the Federal Housing Administration, typically have less stringent qualifications because they’re designed for low-to-moderate income home buyers. Borrowers using an FHA loan to buy a home can typically have a higher LTV ratio, but they’ll also be required to pay a mortgage insurance premium (MIP) throughout the life of their loan.

The exception involves down payments of 10% or higher. In this case, mortgage insurance is paid for 11 years. 

LTV Ratio For VA And USDA Loans

VA and USDA loans allow a borrower's LTV ratio to reach and sometimes exceed 100%. While there’s also no private mortgage insurance involved with either of these loan types, they both do involve other fees that borrowers should be aware of before applying for these loans.

Looking to lower your LTV ratio? It doesn’t have to be as difficult as you might think.

Make A Larger Down Payment

Saving up for a larger down payment isn’t always easy, but applying one to a purchase is one of the fastest ways to help you lower your LTV. In essence, increasing the amount of your down payment lowers the total amount of money that you’re asking to borrow, which automatically lowers your LTV. A mortgage calculator can help you get a better sense at a glance of how much bringing a larger down payment to the table can affect your monthly payment.

Look For A More Affordable Home

Can’t afford to make a larger down payment? Consider shopping around for a more value-priced property. By lowering the amount of money that you need to borrow, purchasing a lower-priced home can help you decrease your LTV if you keep your down payment the same. Alternatively, you can consider offering a lower price to a seller in exchange for a home purchase – in today’s market, you never know just how motivated the seller might be.

Loan-to-value ratio is an important calculation to be aware of in real estate. A percentage figure that compares the value of an appraised home that you’re looking to purchase against the loan amount that you’re looking to borrow, it helps give lenders a better sense of when you’re a safe bet from a lending perspective.

The lower your LTV, in general, the better off you’ll be when it comes to borrowing money. Having a lower LTV can increase your odds of securing a better home mortgage and means you’ll have more equity in your home. Looking to find out more about getting a home loan today? Apply online now with Rocket Mortgage. You can also give us a call at (833) 326-6018.