The Loan-To-Value (LTV) ratio is used by banks, mortgage lenders, and other financial institutions to compare the amount of debt financing needed to purchase a home with its appraised value. The LTV ratio is one of the tools that lenders use to assess risk when offering loans. It also helps them determine the amount they are willing to loan an individual or business. Each lender requires different LTV ratios, so borrowers should research before selecting one. Loan-to-value ratios may also affect the approval of a loan, so borrowers need to be aware of this concept and use it to their advantage. The loan-to-value ratio is essential for both the lender and the borrower. This measurement helps lenders manage risk when issuing home or property loans. Different LTV ratios signify different levels of risk for lenders, influencing which loans they approve. On the other hand, knowing their LTV ratio can help borrowers optimize their loan application to ensure it is approved. For instance, to get approved for a mortgage loan, they can increase the amount of their down payment or lower their requested loan to meet the LTV criteria of a particular lender. Different lenders have different LTV ratio criteria, which prospective borrowers may or may not be able to meet. Thus, the LTV ratio also helps borrowers determine which lender is the most appropriate one for them. The loan-to-value ratio is calculated by dividing the loan or mortgage amount by the property's appraised value. The resulting amount is then multiplied by 100. For example, if a borrower took out a $200,000 loan for a home valued at $250,000, their LTV ratio would be calculated as follows:What Is the Loan-To-Value (LTV) Ratio?
Why Do LTVs Matter?
How to Calculate the Loan-To-Value (LTV) Ratio
LTV Ratio = 200,000/250,000 x 100
= 80%
This means that the borrower's loan-to-value ratio would be 80%.
Loan-To-Value (LTV) Limits for Different Mortgage Types
Different mortgage types have various loan-to-value ratio limits.
Conventional Mortgages
Conventional mortgages are loans that follow the guidelines set by government-sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac.
Generally, these loans have a maximum LTV ratio of 80%, meaning that the loan is typically no more than 80% of a property’s appraised value.
Mortgage Refinances
LTVs for this type may vary based on the kind of property refinanced, whether the mortgage is fixed or adjustable and whether a homeowner is doing a standard refinance or cash out.
However, mortgage refinancing generally requires a maximum LTV ratio of around 80% of the property's appraised value.
FHA Loans
The Federal Housing Administration (FHA) also has specific guidelines for loan-to-value ratios. Generally, the maximum LTV ratio is 96.5%, meaning that a borrower can finance up to 96.5% of the appraised value of their property with an FHA loan.
However, borrowers must note that no matter how much their down payment is, they will still be required to pay for mortgage insurance when they take out an FHA loan.
VA Loans
Generally, Veterans Affairs (VA) loans have a maximum LTV ratio of 100%. This means that veterans can finance up to 100% of the value of their property with a VA loan.
However, unlike FHA loans, VA loans do not require borrowers to purchase mortgage insurance as part of the loan program. This can be a significant advantage for some borrowers looking to save money on their monthly payments.
USDA Loans
The U.S. Department of Agriculture's (USDA) LTV ratio for home loans is typically 100%, meaning borrowers can finance up to the total value of their home with a USDA loan.
USDA loans are available to eligible borrowers who live in rural areas or have limited access to traditional home mortgage loans. However, additional requirements may need to be met, including income limits.
What Is a Good LTV?
The ideal LTV ratio for most lending institutions is 80%, meaning the loan amount should be, at most, only 80% of a property's appraised value. It is to the borrower's advantage to aim for a lower LTV by increasing their down payment and lowering their loan amount.
Lower LTVs can signify to lenders that borrowers have invested considerable equity in the property in the form of a higher downpayment. Thus, the borrower is less likely to default on their financial obligations.
Borrowers with lower LTVs are perceived to be less risky since they request a smaller loan amount. A lower LTV increases borrowers' chances for approval, improves interest rates, and grants them the freedom to choose between lenders.
LTV vs. Combined LTV
One crucial metric that lenders examine when issuing loans is the Loan-To-Value ratio. The LTV ratio compares the loan amount vs. the value of the asset being acquired.
For example, if a borrower took out a $250,000 loan to purchase a $300,000 home, their LTV would be 83%. Most lenders approve loans with an LTV ratio of at most 80%. Thus, it benefits the borrower to have a lower LTV when taking out a loan.
However, there are times when two loans are used to secure one asset. In this case, lenders might look at the Combined Loan-To-Value (CLTV) Ratio instead. CLTV factors in multiple mortgages and other loans secured by the same property and divide that sum by its value.
For instance, if someone has an existing mortgage worth $200,000 and then obtains a second mortgage for $50,000 on a $400,000 home, their Combined Loan-To-Value would be 62.5%. Lenders tend to require lower CLTV ratios since it is a more comprehensive risk measurement.
Whether lenders use the LTV or CLTV to assess a loan’s risk, knowing about these key metrics can help prospective home buyers understand how much money they can borrow when purchasing a property.
The Bottom Line
The loan-to-value ratio is a financial term used to represent the amount of money borrowed from a lender compared to the total value of the asset. It is calculated by dividing the loan amount by the asset's appraised value and multiplying the quotient by 100 to produce a percentage.
Knowing the loan-to-value ratio is essential when purchasing high-value assets such as real estate or vehicles that require significant upfront financing. This number can determine how likely lenders are willing to finance these investments and at what interest rate.
Different types of lenders can require various LTV ratios. However, regardless of the LTV ratio they require, lenders often limit their exposure to risk by requiring a low LTV ratio. This is because the higher the LTV ratio, the greater risk that the lender takes on by approving the loan.
In general, loans with higher LTV ratios are associated with higher interest rates, while loans with lower LTV ratios tend to have more advantageous terms for borrowers. Knowing about this metric can help borrowers optimize their loan applications and obtain better terms.
If you plan to place a loan to purchase property, you can consult with a mortgage loan officer and see how your loan-to-value ratio can influence your approval chances.
Loan-To-Value (LTV) Ratio FAQs
The Loan-to-Value ratio is calculated by dividing the loan amount by the property's appraised value. For example, if a borrower takes out a $250,000 loan to purchase a $300,000 home, their LTV would be 83%.
One of the main drawbacks of loan-to-value is that lenders view high LTV ratios as a greater risk. Thus, borrowers with higher LTV ratios may have to pay higher interest rates or may not qualify for financing. Borrowers with an LTV ratio above 80% may also be required to purchase private mortgage insurance, which can make their monthly payments more expensive.
Borrowers can lower their Loan-to-Value ratio by making a larger down payment on the property or reducing their overall loan. If borrowers do not have the financial capacity to do either on their own, they may raise money from friends or family.
Loan-to-Value ratios are affected by the borrower's down payment, property appraisal value, and overall loan amount. A larger down payment will result in a lower LTV ratio, whereas a higher loan amount or lower appraised value will lead to a higher LTV ratio.
The primary difference between Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) is the number of loans included in the calculation. LTV only considers the primary loan, while CLTV factors in multiple loans secured against one asset.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
FAQs
How do you interpret loan-to-value ratio? ›
The loan-to-value (LTV) ratio is a measure comparing the amount of your mortgage with the appraised value of the property. The higher your down payment, the lower your LTV ratio. Mortgage lenders may use the LTV in deciding whether to lend to you and to determine if they will require private mortgage insurance.
Why is the LTV ratio important to lenders? ›Lenders use it to gauge a loan's potential risk: In general, the higher the LTV ratio, the more likely it is the lender might lose money if you default on the loan, and the more likely a lender may have to foreclose on your home.
What is the main factor that determines the LTV loan-to-value ratio? ›The main factors that impact LTV ratios are the amount of the down payment, sales price, and the appraised value of a property. The lowest LTV ratio is achieved with a higher down payment and a lower sales price.
What is an acceptable LTV ratio? ›What Is A Good LTV Ratio For A Mortgage? 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.
What does 80% loan-to-value ratio mean? ›The loan-to-value ratio is the amount of the mortgage compared with the value of the property. It is expressed as a percentage. If you get an $80,000 mortgage to buy a $100,000 home, then the loan-to-value is 80%, because you got a loan for 80% of the home's value.
What does a low loan-to-value ratio indicate? ›A lower loan-to-value ratio means there is more equity on the home, and you are considered less risky to default on the loan. It also gives the lender peace of mind because if you were to default, they could sell the property in foreclosure and make up the loss.
Is it better to have a higher LTV? ›Broadly speaking, a low loan-to-value ratio is good, and a high ratio is less desirable. Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.
Why is increasing LTV important? ›LTV is also important because it shows you the path to higher profits. If you increase LTV, then you increase profits, plain and simple. According to Marketing Metrics, the possibility of selling to a new prospect is 5-20%, but the probability of selling to an existing customer is 60-70%.
What LTV gives best mortgage rates? ›What is a 'good' loan-to-value ratio? As a general rule of thumb, your ideal loan-to-value ratio should be somewhere under 80%. Anything above 80% is considered a high LTV. There are plenty of mortgages available for people with LTVs at 80%, 90%, or even 95%, but you'll be paying much more on interest.
How do lenders calculate LTV? ›- Current loan balance ÷ Current appraised value = LTV.
- Example: You currently have a loan balance of $140,000 (you can find your loan balance on your monthly loan statement or online account). ...
- $140,000 ÷ $200,000 = .70.
What type of loan would probably have an 80% LTV ratio? ›
Conventional loan – The magic LTV ratio for most lenders is 80 percent. This means you can afford to make a 20 percent down payment, and as a borrower, you won't have to pay private mortgage insurance. FHA loan – Generally, an LTV ratio of 96.5 percent will suffice for securing an FHA loan.
Is LTV based on appraisal or purchase price? ›For refinance home loans the LTV is determined by dividing the loan amount by the appraised value. The higher the appraised value, the lower the LTV.
What does 100% LTV mean? ›LTV stands for loan-to-value ratio. That's the percentage of the current market value of the property you wish to finance. So a 100 percent LTV loan is one that allows you to borrow a total of 100 percent of your property value. Related: Home equity loan vs home equity line of credit (HELOC)
What happens if a loan has a loan-to-value ratio that is higher than 80%? ›If you're buying a house with a conventional loan—that is, a mortgage that's not backed by a federal program—an LTV ratio greater than 80% may mean you're required to buy private mortgage insurance (PMI), which covers the lender against loss if you fail to repay your loan.
Would a loan-to-value ratio of 80 percent require a buyer to make a 20% down payment? ›Generally, 80% LTV is considered a good loan-to-value ratio. If you're buying a home, you achieve an 80% LTV by making a 20% down payment. Homeowners with an 80% LTV do not have to pay for private mortgage insurance (PMI). And they typically qualify for lower interest rates.
What does a loan-to-value ratio of 90 10 mean? ›If you're making a down payment of 10% of the home value and borrowing the rest, your mortgage's LTV ratio will be 90%. If you're making a down payment of 20% of the home's value, your mortgage LTV will be 80%. The higher your down payment, the lower your LTV ratio will be.
What loan-to-value ratio should not be exceeded? ›When buying a home, an LTV of 80% or under is generally considered good—that's the level you can't exceed if you want to avoid paying for mortgage insurance. In order to achieve an 80% LTV, borrowers need to make a down payment of at least 20%, plus closing costs.
Is lower LTV better? ›Broadly speaking, the lower your LTV, the better. Although some lenders offer mortgages at up to 95% of the property value, ideally it's best to keep your LTV below 80%. As well as securing a better mortgage rate, it means you'll get access to a wider range of mortgage deals.
Why is high LTV risky? ›A high LTV signifies more risk because if you default on the loan, it's less likely that the lender will get enough money by repossessing and selling the asset to cover the remaining loan amount and its costs associated with the process.
Is 55% a good LTV? ›A 55% LTV mortgage is at the low end of the typical range – usually, lenders offer LTVs between 50% and 95%. With a 55% LTV, lenders are taking on less of a risk, so you'll have a wide range of competitive options to choose from, with better deals and a lower total cost than you would with higher LTVs.
Does LTV affect how much I can borrow? ›
The LTV affects the amount you can borrow, and the rate you can borrow at. The lower the LTV, the better the mortgage rates available to you will be.
What is a 95% loan to value LTV mortgage? ›A 95% mortgage, also known as a 95% loan-to-value (LTV) mortgage, is a mortgage to purchase a property with a small deposit (at least 5% but less than 10% deposit of the purchase price). Your deposit is the amount of money that you need to put into the mortgage to make up 100% of the final purchase price.
Is a 75% LTV good? ›A 75% LTV mortgage is at the lower middle end of the typical range – usually, lenders offer LTVs between 50% and 95%. With a 75% LTV, lenders are taking on less of a risk, so you'll have a wide range of competitive options to choose from, with better deals and a lower total cost than you would with higher LTVs.
How can I get equity out of my house without refinancing? ›Sale-Leaseback Agreement. One of the best ways to get equity out of your home without refinancing is through what is known as a sale-leaseback agreement. In a sale-leaseback transaction, homeowners sell their home to another party in exchange for 100% of the equity they have accrued.
Is LTV based on revenue or profit? ›Remember that CAC only takes into account costs associated with bringing that customer onboard, like marketing and advertising costs. Any costs after that need to be taken into account when you're calculating your LTV rates. LTV should always be based on profit—not revenue.
What happens if house appraises for more than purchase price? ›If A House Is Appraised Higher Than The Purchase Price
It simply means that you've agreed to pay the seller less than the home's market value. Your mortgage amount does not change because the selling price will not increase to meet the appraisal value.
What is a good LTV? LTVs at 60% or below are considered the best in terms of getting the best mortgage deals. Ideally, lenders like to see LTVs at 80% or below. However, it is possible to sometimes find mortgage deals if your LTV is above 90%.
How can I reduce my LTV on my mortgage? ›There are two ways to reduce your LTV: saving up a larger deposit or reducing the amount of money you need to borrow.
What does 60% LTV mean? ›A 60% loan to value (LTV) mortgage is available when you have a deposit of at least 40% of the value of the property you're buying or remortgaging. This means you'll be borrowing the remaining 60% of the property value from the lender.
What does higher loan-to-value ratio mean? ›A maximum loan-to-value ratio is the highest LTV a lender is willing to accept. In mortgage lending, for example, the higher the loan-to-value ratio, the larger the percentage of a home's purchase price that is being financed through borrowing.
What does 90 LTV mean? ›
Your “loan to value ratio” (LTV) compares the size of your mortgage loan to the value of the home. For example: If your home is worth $200,000, and you have a mortgage for $180,000, your LTV ratio is 90% — because the loan makes up 90% of the total price.
What happens if your loan-to-value ratio is less than 80 percent? ›What Is a Good LTV? If you're taking out a conventional loan to buy a home, an LTV ratio of 80% or less is ideal. Conventional mortgages with LTV ratios greater than 80% typically require PMI, which can add tens of thousands of dollars to your payments over the life of a mortgage loan.
What does loan-to-value 90% of 200000 mean? ›Loan-to-value ratios are easy to calculate. Just divide the loan amount by the current appraised value of the property. For example, if a lender gives you a $180,000 loan on a home that's appraised at $200,000, you'll divide $180,000 over $200,000 and get an LTV of 90%.
What is a good and bad LTV? ›As a general rule of thumb, your ideal loan-to-value ratio should be somewhere under 80%. Anything above 80% is considered a high LTV. There are plenty of mortgages available for people with LTVs at 80%, 90%, or even 95%, but you'll be paying much more on interest.
Is 40% a good LTV? ›LTVs at 60% or below are considered the best in terms of getting the best mortgage deals. Ideally, lenders like to see LTVs at 80% or below. However, it is possible to sometimes find mortgage deals if your LTV is above 90%.