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.

The loan-to-value ratio (LTV) is a percentage that measures the loan amount you need to borrow against the appraised value of the home you want to buy. For a refinance, your LTV is the sum of the outstanding balances for all liens against the appraised value of the property. Lenders frequently use the LTV ratio to assess any risks of lending money. Your loan-to-value ratio is one of several factors lenders use to determine mortgage rates, including the prime rate, property type, the borrower’s credit score and other loan criteria.

Let’s look at how to calculate your LTV and measure its potential impact on your mortgage or refinance application.

To calculate your LTV ratio when buying a home, divide your total loan amount by the property’s appraised value. To calculate your LTV ratio when refinancing, divide the new loan amount by the market value of the house. In both cases, you’ll convert the result into a percentage.

LTV ratio = Loan amount / Appraised value ✕ 100

For example, imagine a lender offers you a $150,000 loan for a home appraised at $200,000. Divide $150,000 by $200,000 and multiply the result by 100 to get your LTV ratio of 75%.

Lenders commonly use the loan-to-value ratio in real estate transactions to determine a borrower’s eligibility for a loan.

Your LTV compares the size of the loan you’re applying for to a home's value. Lenders use LTV to determine how much risk they’re potentially taking on when they lend money and to figure out which loans borrowers qualify for based on the size of their down payment when purchasing a home or the amount of equity they have in the home when refinancing.

To put it simply: The lower your LTV, the less risky a lender will consider the mortgage. A low LTV can improve your odds of qualifying for a competitive mortgage or favorable refinance terms.

LTV requirements differ by lender and can impact interest rates, the size of your down payment and the possibility of paying mortgage insurance.

A good LTV ratio to aim for with most mortgage loans is around 80% or lower. An LTV in this range can help you secure a loan and boost your chances of avoiding mortgage insurance, saving you thousands on your mortgage.

While you can avoid mortgage insurance with a 20% down payment, you can qualify for a conventional loan with 3% down. Conventional loans aren’t government-backed. They meet the conforming loan limits of Fannie Mae and Freddie Mac. Conventional loans typically have stricter requirements than government-backed loans, including higher credit scores.

If your LTV is higher than 80%, you’ll likely pay private mortgage insurance (PMI). Mortgage insurance protects lenders when a borrower defaults on a loan.

Acceptable LTV ratios can differ based on the type of mortgage you’re applying for. Let’s take a look at government-backed loans.

LTV Ratio For FHA Loans

FHA loans, backed by the Federal Housing Administration, typically have less stringent borrower requirements to accommodate credit and savings issues for low- to moderate-income home buyers. FHA loan borrowers usually have a higher LTV ratio and pay the loan’s mortgage insurance premium (MIP) for the life of the loan or 11 years if they put 10% or more down.

LTV Ratio For VA And USDA Loans

Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans allow a borrower's LTV ratio to reach and sometimes exceed 100%. While borrowers won’t pay private mortgage insurance for either loan, each loan has fees borrowers should be aware of before applying for these loans.

Looking to lower your LTV ratio? It may be easier than you’d imagine.

Make A Large Down Payment

Saving up for a larger down payment is challenging for many home buyers, but making a large down payment is one of the fastest ways to lower your LTV ratio. The higher your down payment, the less money you’ll need to borrow, lowering your LTV. Use a mortgage calculator to assess the impact of a larger down payment on your monthly mortgage payment.

Look For A More Affordable Home

If you can’t afford a larger down payment, consider shopping around for a less expensive property. Purchasing a lower-priced home can help you decrease your LTV if you keep the down payment the same. Depending on the real estate market, you may want to consider submitting lower purchase offers.

Loan-to-value ratio is an important calculation to know in real estate. It compares a property’s appraised value to the loan amount you need to borrow and helps lenders better assess the risk they’re potentially taking when lending money.

Generally, the lower your LTV, the better off you’ll be when borrowing money. A lower LTV can increase your odds of securing a favorable mortgage, and 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® or call us at (833) 326-6018.