Your loan-to-value ratio (LTV) represents the relationship between the size of the loan you take out and the value of the property that secures the loan. Understanding LTV can help you find the right loan and down payment for you. Let’s explore LTV in detail.
What Is The Loan-To-Value Ratio (LTV)?
Your LTV compares the size of the loan you’re getting with the value of the home. LTV is usually expressed as a percentage. Lenders use LTV to determine how much risk they’re taking on when they lend to you. They also use it to figure out which loans you’re eligible for based on the size of your down payment or the amount of equity you have.
How Do You Calculate LTV?
You can calculate your LTV by dividing your loan amount by the value of the property you’re buying or refinancing. You can turn this number into a percentage by multiplying it by 100.
For example, let’s say you want to buy a home that’s worth $200,000. You offer the seller $150,000 and they accept your offer. When you apply for a mortgage, you tell your mortgage lender that you have a 20% down payment of $30,000.
First, subtract your down payment ($30,000) from the total selling price ($200,000) to get $170,000. This is the amount you plan to borrow. Then, divide your loan amount ($170,000) by the value of the property ($200,000) to get .85. Multiply the result by 100 to get your LTV, which is 85%.
What Is A Good Loan-To-Value Ratio?
Generally, the lower your LTV, the better your chances are of getting approved and getting a lower interest rate. An LTV of 80% or lower will help you avoid paying for private mortgage insurance and will allow you to qualify for a wide range of loan options.
A higher LTV means more risk for the lender for a couple of reasons:
- The lender has to lend more money on the purchase. If home values decline, the lender loses more money.
- Buyers who invest more of their own money upfront are less likely to walk away from the home. When buyers have higher stakes in their loan, they’re less likely to stop making payments.
Different loan types have different LTV requirements. Here are some of the most common mortgage types and their maximum loan-to-value ratios.
Conventional loans usually meet guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy mortgages from lenders. Conventional loans typically have a higher bar for approval than other types of loans.
You can get a conventional loan with an LTV as high as 97%. However, your LTV may need to be lower depending on your circumstances and the exact type of loan you’re getting. An LTV of 80% or lower will help you avoid private mortgage insurance.
FHA loans are backed by the Federal Housing Administration so lenders can offer mortgages to borrowers who might not qualify for other loans. You can get an FHA loan with an LTV of up to 96.5%.
VA loans, backed by the Department of Veterans Affairs, are a benefit of service for active-duty service members and veterans. VA loans are one of the few loans that allow you to borrow on the full value of the home – up to 100% LTV. This means you don’t need to have a down payment to get a VA loan. You can also refinance up to 120% of your home value with a VA loan.
USDA loans don’t require a down payment, so you can get a loan with up to 100% LTV.
Jumbo loans are mortgages that exceed conventional loan limits. The loan limit for most areas is $510,400, although the loan limits are higher in certain high-cost areas of the country.
Jumbo loans are one of the riskiest types of mortgages for lenders, so they have strict LTV requirements. You’ll need an LTV of no higher than 70% to 85% to get a jumbo loan.
How To Lower Your LTV
If your LTV is too high for you to qualify, here’s what you can do.
Get A Larger Down Payment
Bringing a larger down payment to the table is one of the fastest ways to lower your LTV. Adding to your down payment lowers the amount your lender must give you, which automatically gives you a lower LTV. A mortgage calculator can help you see how your down payment amount affects your monthly payment.
Buy A Lower-Priced Home
If you can’t come up with a larger down payment, you may want to shop around for a more affordable home. A lower home price means you’ll borrow less money, which decreases your LTV if you keep your down payment the same.
Let’s compare LTV for two loans. One home is worth $200,000 and another home is worth $175,000. Let’s assume that for both, you’re willing to make a $15,000 down payment.
If you were to buy the first home, you’d borrow $185,000 from your mortgage lender. This means your LTV would be 92.5%.
If you were to buy the second home, you’d only borrow $160,000. This means your LTV would be about 91.4% – more than an entire percentage point lower.
Another option is to offer at a lower price. If you think the home is overpriced, or if there’s not competition for the home, you may be able to convince the seller to lower the sale price – especially if they’re motivated to sell.
Find The Right Loan Type
If you can’t get a lower home price or a larger down payment, you may want to look at loan options that offer low or no down payment. Conventional loans are available with a down payment as low as 3%. USDA and VA loans don’t require a down payment, but you must meet specific criteria to qualify.
Rocket Mortgage® by Quicken Loans® can show you which options you’re eligible for based on your LTV. Apply now to see expert mortgage recommendations.
Your loan-to-value ratio (LTV) shows the size of the loan compared to the value of the home. You can calculate your LTV by dividing your loan amount by the home value.
A good LTV is a lower LTV. An LTV no higher than 80% will give you the most options, but you can buy a home with an LTV as high as 100% if you qualify for a USDA or VA loan.
If your LTV is too high, you can offer a larger down payment, buy a lower-priced home or choose a different loan type. Rocket Mortgage® can show you exactly what loans you qualify for based on your LTV and other factors.
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