Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio compares the loan amount to the property’s value. Learn why LTV matters for mortgage approval and rates.
Definition
The loan‑to‑value (LTV) ratio measures the size of a mortgage relative to the appraised value or purchase price of the property (whichever is lower). It’s calculated by dividing the loan amount by the property’s value. For example, a $90,000 loan on a $100,000 home has an LTV of 90%. Lenders use LTV to assess risk: higher ratios indicate lower borrower equity and may require higher interest rates or mortgage insurance. Conventional loans typically require an LTV of 80% or lower to avoid PMI, while FHA and VA loans permit higher LTVs with insurance or guarantee fees.
Why It Matters
LTV sets the price of the loan, not just whether you get one. Crossing from 80.1 percent down to 80 percent removes mortgage insurance completely, worth $150 to $250 a month on a $600,000 loan. It also decides whether a low appraisal blows up your purchase, since lenders compute LTV against the lower of appraised value and contract price.
Examples
Under contract at $700,000 with 20 percent down, the buyer receives an appraisal of $675,000. The loan caps at $540,000 rather than $560,000, so they wire an extra $20,000 at closing to stay at 80 percent.
A homeowner owing $310,000 on a house now worth $520,000 sits at 60 percent LTV, leaving room for a HELOC up to a combined 85 percent, or about $132,000.
Cash-out refinances usually cap at 80 percent. On a $480,000 appraisal with a $300,000 first mortgage, the most cash available before costs is $84,000.
Tips
Structure the deal at 79.5 percent instead of exactly 80. A $2,000 appraisal shortfall against a hard 80 percent target forces either mortgage insurance or a surprise cash call at signing.
Near the line, ask for quotes on lender-paid and single-premium mortgage insurance next to the monthly version. The break-even usually falls between three and five years, so choose based on how long you will hold the loan.
Second liens are governed by combined LTV, not first-mortgage LTV. Add any existing HELOC balance before assuming there is borrowing room left.
Related Terms
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Debt-to-Income Ratio (DTI)
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Private Mortgage Insurance (PMI)
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