Loan-To-Value (LTV) Ratio: What It Is and Why It Matters
A loan-to-value (LTV) ratio is a number that compares how much you’re borrowing to your home’s value. The higher your LTV ratio, the more risky your loan will look to a lender — and the more expensive it will likely be for you.
Lenders use your LTV ratio to determine your interest rate, monthly payment, loan amount and whether you’ll need to pay for private mortgage insurance. Improving your LTV can save you a lot of money, and we’ll cover some simple ways to do so.
What is a loan-to-value ratio?
An LTV ratio is a number — expressed as a percentage — that compares two things: your mortgage size and the value of the home you’re buying or refinancing.
Lenders use LTV ratios to gauge a loan’s potential risk. In general, the higher the LTV ratio, the more likely it is that the borrower will go into mortgage default and the lender will lose money. That’s why loans with higher LTVs tend to cost more — lenders need to compensate for this increased risk. It’s also why lenders set a cap on how high your LTV can go.
How to calculate LTV
Formula to calculate loan-to-value ratio
LTV ratio = Loan amount ÷ Home value*
*Home value is your home’s purchase price or appraised value, whichever is lower.
Calculating LTV yourself by hand
You can calculate LTV yourself by following these easy steps:
- Divide the amount you’re borrowing by your home’s price or appraised value.
- Then, convert the resulting decimal into a percentage by moving the decimal two places to the right (multiplying by 100).
For example: If you’re buying a house for $400,000 and making a 10% down payment, you’ll need a loan for $360,000. To calculate the LTV ratio on that loan:
If you’re buying a house, an LTV ratio can help you determine the most you can borrow, based on both the home’s price and a lender’s loan program guidelines.
For example, if you’re buying a $300,000 house and are approved for a loan program that has a maximum 97% LTV ratio, you’d calculate your borrowing maximum this way:
If you’re looking to refinance, first, calculate your current LTV ratio and compare it to the maximum allowed for the refinance loan that interests you. For this calculation, you’ll need to know how much you still owe on your mortgage. Let’s say you have a $200,000 balance on a home worth $300,000.
An LTV ratio can also help you determine how much cash you might qualify to take out with a cash-out refinance. This type of refinance replaces your current mortgage with a larger loan and lets you pocket the extra cash.Let’s say you’re applying for a cash-out refinance program that has a standard 80% LTV ratio cap. First, you’ll determine the maximum amount you might receive with a cash-out refinance loan. For this example, let’s again assume the home is worth $300,000 and your current mortgage balance is $200,000:
After the new refinance loan covers your outstanding $200,000 mortgage balance, you’d receive $40,000 in cash.
Use a mortgage calculator to estimate your monthly payment with your new loan amount.Finding home equity LTV
When you’re taking out a second mortgage, like a home equity loan or home equity line of credit (HELOC), lenders typically calculate a “combined” loan-to-value ratio (CLTV) that encompasses both loans. Learn more about CLTV and view an example below.
LTV vs. combined LTV (CLTV)
You’re likely to spot references to a “combined-loan-to-value ratio” (CLTV) if you’re taking out a home equity loan or HELOC. The term refers to the fact that lenders typically combine the loan balances on both your first mortgage and the home equity product you’re applying for to come up with a CLTV ratio to secure against your home.
How to calculate a combined LTV ratio
To calculate CLTV, follow these steps:
- Add your loan balances together.
- Divide that amount by your home’s value.
For example: Let’s say you have a $400,000 home and $300,000 first mortgage balance, and you’re looking to take out a $20,000 home equity loan.
$320,000 ÷ $400,000 = 0.80 or 80% CLTV
Why your LTV ratio matters
It also means:
→ Your mortgage payment will be higher. Borrowing more money means a higher monthly mortgage payment.
→ It’s more difficult to qualify. Higher monthly payments need more income and assets to qualify.
→ You may need more cash on hand. You may need to prove you have enough mortgage reserves to cover a few months’ worth of payments.
→ You may have to pay for private mortgage insurance (PMI). If you don’t have at least a 20% down payment, conventional lenders will charge PMI premiums, which can be costly.
It also means:
→ Your interest rate may be lower. Lenders reward lower-risk borrowers with lower interest rates.
→ Your mortgage payment will be lower. The less you borrow, and the lower your interest rate, the more affordable your payments.
→ You may qualify for a property inspection waiver (PIW). LTV is usually the deciding factor when it comes to either getting an appraisal waiver or having to pay for a home appraisal.
→ You may be able to skip some loan costs like private mortgage insurance.
Read more about deciding how much your down payment should be.LTV ratio rules for common mortgage programs
Most lenders publish the maximum LTV ratio they’ll allow for each mortgage program they offer. Here are LTV ratio limits for the most common loan types used to buy or refinance a single-family home:
| Loan program | Loan purpose | Maximum LTV |
|---|---|---|
| Conventional | Purchase (fixed rate) | 97% |
| Purchase (adjustable rate) | 95% | |
| Rate-and-term refinance | 97% | |
| Cash-out refinance | 80% | |
| FHA | Purchase | 96.50% |
| Rate-and-term refinance | 97.75% | |
| Cash-out refinance | 80% | |
| VA | Purchase | 100% |
| Rate-and-term refinance | 100% | |
| Cash-out refinance | 90% | |
| USDA | Purchase | 100% |
| Rate-and-term refinance | 100% | |
| Cash-out refinance | Not allowed |
Your lender may limit you to a lower LTV ratio than the ones listed here if you’re buying or refinancing a rental property, a two- to four-unit home or a second home (also known as a vacation home).
When you can exceed LTV limits
You may be able to borrow more than the limits listed above if:
- You’re taking out a home equity loan or home equity line of credit (HELOC)
- You have an underwater mortgage (your home is worth less than your mortgage balance) and you’re eligible for a Home Affordable Refinance Program (HARP) replacement loan.
- You’re applying for Fannie Mae’s Community Seconds mortgage program or a down payment assistance (DPA) program that lets you borrow up to 5% more than your home is worth.
Refinance programs that don’t require an LTV ratio
You won’t need to deal with LTV ratio restrictions if you’re eligible for one of the following loan programs:
FHA streamline loanIf you already have an FHA loan insured by the Federal Housing Administration and want to refinance, you may qualify for an FHA streamline loan, which doesn’t require your home’s value to be verified.
See today’s FHA refinance rates and compare offers.
VA IRRRLMilitary borrowers can refinance without an LTV ratio calculation if they already have a VA loan backed by the U.S. Department of Veterans Affairs and qualify for an interest rate reduction refinance loan (IRRRL).
See today’s VA refinance loan rates and compare offers.
USDA streamline loanBorrowers who took out a USDA loan guaranteed by the U.S. Department of Agriculture can refinance with a USDA streamline loan that doesn’t require either a home appraisal or an LTV ratio limit.
4 ways to lower your LTV ratio
- Ask for a cash gift to help with your down payment. A friend, family member or employer may be able to gift funds to use toward your down payment amount and closing costs.
- Make extra payments on your principal. Your LTV ratio drops with every mortgage payment. If you make even one extra payment each year, you’ll lower your LTV ratio faster.
- Pick a shorter-term loan. If your budget can handle a higher monthly payment, a 15-year fixed-rate mortgage will lower your LTV ratio more quickly than a 30-year loan.
- Buy a less expensive home. Choosing a home at the lower end of your down payment budget might help you avoid a high-LTV ratio loan.
Learn more about other steps you can take to save for a house.