• A loan-to-value (LTV) ratio shows how much of an asset's value is financed. 
  • To calculate your home's LTV, divide the loan balance by the current value of the property, then multiply the result by 100.
  • LTVs affect mortgage approval, interest rates, mortgage insurance, risk of negative equity, down payment amounts, and opportunity for equity-based borrowing.   

When it comes to buying or owning a home, understanding your loan-to-value ratio is essential. This simple calculation can impact your mortgage approval, interest rates, and even your long-term financial opportunities as a homeowner. 

Find out how LTV affects your finances and how to improve your ratio with this introduction to loan-to-value.

Understanding Loan-to-Value Ratios

A loan-to-value ratio is a financial calculation that shows how much of an asset is financed as a percentage of its total value. 

This information is commonly used in real estate transactions to see how much of a property’s value is held by the lender vs. how much of the value is held by the owner. The owner’s portion is called equity, while the lender’s is called debt (or the loan balance). 

Higher LTVs are generally associated with greater risk. The mortgage lender takes more risk by lending a higher percentage of the property’s value because they stand to lose more if the borrower defaults on the loan.[1]  A higher LTV is also riskier for homeowners because it leaves them with less equity.

How To Calculate Loan-To-Value Ratio

The formula for calculating LTV is:

LTV = (loan amount / property value) x 100

So, to calculate LTV, divide the loan amount by the current value of the property, then multiply by 100 to convert the result to a percentage.

Example of an LTV Ratio Calculation

A homebuyer purchases a $500,000 home with a $400,000 loan. 

Dividing the 400,000 loan by the $500,000 property value equals .8. 

Multiplying .8 by 100 equals 80.

So, the LTV ratio for this homebuyer is 80%.  

How To Find the Loan Amount and Property Value

The current loan amount can be found on your most recent loan statement. If you are a homebuyer calculating LTV for a home purchase, the loan amount can be found on your loan estimate. 

If you are in the process of buying a home, you may have ordered a home appraisal to confirm the value of the property. This document provides a professional assessment of the property’s value. If you have owned the home for a while, the most accurate way to determine the current value is to order a new home appraisal. If you just want a ballpark idea, you can contact a local real estate agent and ask if they offer a free CMA (comparative market analysis).    

What Is CLTV?

Combined loan-to-value ratio (CLTV) is used when a property has a second mortgage (like a HELOC or home equity loan) in addition to the primary mortgage. 

The formula for calculating CLTV is:

CLTV = (total of all mortgage loans / property value) x 100

So, to calculate CLTV, divide the total of all mortgage loans by the current value of the property, then multiply by 100 to convert the result to a percentage.

Importantly, if you have a HELOC and are still in the draw period, you must use the HELOC limit when calculating your CLTV rather than the HELOC balance.

Why LTV Is Important for Homebuyers and Homeowners

Whether you’re a first-time homebuyer looking for a new mortgage or a homeowner who already has a mortgage in place and is considering refinancing, LTV plays an important role in managing your finances.[1]

How LTV Affects Mortgage Approval

Lenders typically have LTV limits for different home loan types. So, the mortgage approval depends on the buyer’s ability to cover the gap between the loan amount and the purchase price (which is typically considered to be the current value of the property in standard transactions). 

LTV limits can vary by borrower, depending on factors like credit score, but here are a few common examples of LTV limits for mortgage approval:

  • Conventional loans may offer a 97% LTV, which would require the homebuyer to make a 3% down payment.
  • FHA loans may offer a 96.5% LTV, requiring the homebuyer to pay a 3.5% down payment.
  • VA loans, which are reserved for military personnel, veterans, and their spouses, may offer a 100% LTV, requiring no down payment. 
  • USDA loans, which are reserved for properties in qualified rural areas, may also offer a 100% LTV, requiring no down payment. 
  • Loans for real estate investment properties may offer an 85% LTV, requiring a 15% down payment. 
  • Jumbo loans, which allow for higher loan limits up to $5,000,000, may offer an 85% LTV, requiring the home buyer to pay 15% down when subordinate financing is obtained (the max LTV for Jumbo when no additional financing is obtained would be 80%).

How LTV Affects Mortgage Insurance

Mortgage insurance is a policy that protects the lender if the borrower defaults on the loan. This allows lenders to take on riskier loans, including loans with a down payment of less than 20%.

So, if the LTV is greater than 80%, the borrower may be required to pay for mortgage insurance.[1] The specifics vary by loan type, but common forms of mortgage insurance include:

  • Private mortgage insurance (PMI) for conventional loans. 
  • Mortgage insurance premiums (MIP) for FHA loans.
  • VA loan funding fees for VA buyers with an initial LTV of more than 95%.
  • Guarantee fees for USDA loans

How LTV Influences Interest Rates

Interest rates are influenced by factors that indicate risk levels. The greater the calculated risk to the lender, the higher the interest rate may be. This is why a higher LTV could increase the interest rate, while a lower LTV could reduce the rate.[1]

How Higher LTV Increases Risk of Negative Equity

The greater the LTV, the lower the homeowner’s equity. This is important for buyers and homeowners to understand because low equity means increased vulnerability to housing market downturns. 

While property values tend to rise over time, they are subject to shifting market conditions. Values regularly dip during seasonal lulls and recessions when there is lower buyer demand. This is a normal part of homeownership, but it can get risky if market conditions cause the value to decline to the extent that the owner has negative equity.

For example, imagine a new homeowner with a 97% LTV conventional loan. If the market were to suddenly decline in such a way that the property is now worth 5% less than when the owner purchased it, the owner would owe more on the property than it is worth. 

This situation is not a problem as long as the buyer can afford the mortgage payments and doesn’t need to sell. They can simply wait out the downturn until values eventually come back up. However, if they need to sell during this period, the sales price would not cover the loan balance. 

How Lower LTV Creates Financial Opportunities for Homeowners

Over time, the LTV ratio of a home typically increases as homeowners pay down their loan balance, especially if home values are also rising. This creates a few opportunities for homeowners:

  • Termination of mortgage insurance. Homeowners with mortgage insurance can potentially terminate their mortgage insurance policy once the LTV reaches a certain point.[2] For example, a homeowner with a conventional loan may be able to cancel their PMI once the LTV drops below 80%.
  • Home equity loans or lines of credit (HELOCs). Home equity loans and HELOCs enable homeowners to borrow against their equity. This can provide funds for purposes like renovating the home, consolidating debt, or starting a business. To qualify for a home equity loan or HELOC, you would need to meet your lender’s LTV requirements.  

How To Improve Your Loan-to-Value Ratio

There are several options for borrowers looking to reduce their loan-to-value ratios.

For homebuyers:

  • Increase the down payment. A higher down payment reduces the amount of the value financed.
  • Choose a less expensive property. Your down payment budget goes further on a less expensive property, allowing you to finance less of the purchase. 

For homeowners:

  • Get an updated appraisal. If the value of your home has increased due to market conditions or improvements you’ve made, an updated appraisal could show a lower LTV ratio.
  • Pay down your home loan balance to increase your equity. Making extra payments toward your mortgage principal reduces the loan balance, increasing the equity you own in the property.
  • Add value to the property. Renovations or upgrades can boost your property’s appraised value, lowering the LTV ratio.
  • Wait for organic appreciation. Over time, real estate values may naturally rise due to market trends, increasing the value of your home and reducing your LTV ratio.
  • Avoid borrowing against your equity. While home equity loans and HELOCs are valuable tools, they increase your debt and raise your LTV ratio. So, if your goal is to reduce LTV, avoid using these financial resources.

The Bottom Line

A loan-to-value ratio affects everything from your ability to qualify for a home loan to your mortgage payment. Lower LTVs represent less risk for both the lender and the homeowner.  

If you’re planning to buy a home, a down payment of at least 20% will keep your LTV below 80%, which can offer more favorable terms on a mortgage. But don’t let a down payment of less than 20% keep you from getting on or climbing the property ladder. Homeownership is about finding the right balance between affordability and opportunity. Start where you can and build equity over time.  

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