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

When you apply for a mortgage, lenders have requirements borrowers must meet to get approved. One is the loan-to-value ratio, or LTV, which is how much of the home’s value you can borrow. The remainder is the borrower’s responsibility to pay as their down payment.

LTV ratio meaning

The LTV ratio shows how much of the value of a home 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 need can borrow 80% of the home’s value and need to cover the remaining 20% with your down payment.

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

LTV ratio vs. combined LTV ratio

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 only looks 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 ratio?

While specific loan types and lenders set a maximum LTV ratio, the lower your LTV ratio the better. A lower LTV ratio 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, which is required on conventional loans with an LTV ratio higher than 80%.

LTV ratio example

Say you’re buying a home for $420,000 with a 30-year fixed-rate conventional loan. 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 ratio drops to 80% and you can avoid paying for PMI.

How to calculate your LTV ratio

If you’re buying a home, calculate the LTV ratio by subtracting your down payment from the purchase price, dividing the result by the purchase price and multiplying by 100 to get a percentage.

If you have $25,000 for a down payment and you’re buying a home for $350,000, your LTV ratio is $325,000 divided by $350,000, which comes out to 92.8%.

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

Say your home is worth $400,000 and you owe $275,000 on your mortgage, giving you $125,000 in equity. A cash-out refinance for $350,000 would have an LVT ratio of 87.5% and leave you with $75,000 cash.

LTV ratio rules by loan type

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

Conventional loans

The LTV ratio 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 ratio exceeds 80%, you have to 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 ratio 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 are available only to active-duty military personnel, veterans, and their surviving spouses. There’s no down payment required, so the maximum LTV ratio 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 ratio on USDA loans can be as high as 100%.

Fannie Mae HomeReady loans

Loans offered through this Fannie Mae program allow you to take out a mortgage with an LTV of 95% to 97%.

Freddie Mac Home Possible loans

This Freddie Mac loan program requires a maximum LTV ratio of 97%.

How to lower your LTV ratio

There are many ways to lower your LTV ratio, 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 ratio. 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 ratio. 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 ratio helps you get a loan

Your LTV ratio is one of the ways lenders evaluate your risk as a borrower. It helps lenders see how much you are borrowing compared to the value of the home securing the loan. The lower your LTV ratio, the more likely lenders will see you as a safe bet. As such, you could be offered loans at lower interest rates, which could save you tens of thousands throughout the loan.

Ready to look for a home? Start the mortgage process today with Rocket Mortgage^® and find out what you can qualify for, as well as your loan options.