If a home buyer makes a down payment of $40,000 on a home appraised at $200,000, the mortgage loan would be for $160,000. The LTV would be calculated by dividing the loan amount ($160,000) by the appraised value ($200,000) multiplied by 100. That makes the LTV ratio 80 percent. The bigger your down payment and the more home equity you have, the lower the LTV ratio.
Some lenders have offered what is called a high-LTV loan, which lets you borrow more than your home is worth. Most high-LTV loans are worth 125 percent of equity. High-LTV loans are categorized as home equity loans, but the amount above your equity is actually unsecured credit, which means that it is not guaranteed. High-LTV loans are considered high risk and may not be available during poor mortgage or real estate market conditions.
Low LTV ratios (below 80%) usually enable lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low FICO credit scores, large loan amounts, history of previous late payments, high debt-to-income ratios, cash-out requirements, insufficient reserves or no income documentation. Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. The full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers and may not be available at all during poor market conditions.
A related term is Combined Loan to Value ratio (CLTV) which considers all loans on the property. LTV only considers the primary loan but CLTV would include any additional loans such as a Home Equity loan or Home Equity Line of Credit (HELOC). So if you have an additional loan your CLTV would be higher than your LTV and would be considered a higher risk.