When you’re shopping for a new home or refinancing a mortgage, it’s important to understand what your loan-to-value ratio will be. Lenders look at your LTV ratio when deciding whether to approve your loan, and it also affects the terms you can get.
Here’s what you need to know about LTV ratios:
- What Is an LTV Ratio in Real Estate?
- How LTV Ratio Affects Your Ability To Get a Loan
- What Is a Good LTV Ratio?
- How To Lower Your LTV Ratio
- What Factors Can Worsen Your LTV Ratio?
- LTV Requirements for Different Types of Loans
- LTV Ratio vs. Combined LTV Ratio
- How Do LTV Ratios Work for Refinancing?
- FAQ: What Is an LTV Ratio?
- The Bottom Line on LTV Ratios
What Is an LTV Ratio in Real Estate?
A loan-to-value ratio is a number that compares a mortgage loan amount against the appraised value of a home. Lenders use it to help determine a borrower’s eligibility for a mortgage. The higher your LTV ratio, the more risk you pose as a borrower.
Having a high LTV ratio means you risk going “underwater” on the loan, which is when the loan amount exceeds the home’s appraised value. This is also known as negative equity. If you end up with negative equity on a mortgage, it can be difficult to sell the property or refinance without owing money on the original loan.
LTV ratios also affect the size of your down payment, the interest rate on your loan, and whether you’ll need to pay for private mortgage insurance.
How to calculate your LTV ratio
The LTV ratio formula is simple. You can calculate it by dividing your loan amount by the home’s appraised value, and multiplying the result by 100 to get a percentage.
Let’s say you want to purchase a home appraised at $250,000 and make a 20% down payment of $50,000. You would need to borrow $200,000. Your resulting LTV ratio would be 80%, and you’d have 20% equity in the home.
Example of LTV ratio calculations
Here’s an example of LTV ratio calculations using various loan amounts for a home valued at $450,000:
Loan-to-Value Ratio Calculations for a $450,000 Home
| Appraised Home Value | Mortgage Amount | LTV Ratio |
| $450,000 | $425,000 | 94% |
| $450,000 | $400,000 | 89% |
| $450,000 | $375,000 | 83% |
| $450,000 | $350,000 | 78% |
| $450,000 | $325,000 | 72% |
| $450,000 | $300,000 | 67% |
How LTV Ratio Affects Your Ability To Get a Loan
When you submit a mortgage application, your loan-to-value ratio is one of several factors that lenders will consider. Understanding your LTV ratio ahead of applying for a mortgage can help you prepare financially for purchasing a home and understand whether you’ll save money on your loan.
What Does Your Loan-to-Value Ratio Mean for Your Mortgage?
| When Your LTV Ratio Is Low | When Your LTV Ratio Is High |
| Down payment is higher. | Down payment is on the lower end. |
| May be able to qualify with a lower credit score. | Need a higher credit score to qualify. |
| Better odds of getting approved for a mortgage. | Lower odds of getting approved for a mortgage. |
| Lower interest rates. | Higher interest rates. |
| A higher income or more assets aren’t needed to qualify. | A higher income and proof of more assets may be needed to qualify. |
| May be able to roll certain closing costs into your mortgage. | May have to pay more of your closing costs out of pocket. |
| Your lender might not require you to pay for PMI. | Your lender will most likely require you to pay for PMI. |
What Is a Good LTV Ratio?
An ideal starting LTV ratio for homeowners is 80%. This means you put 20% down, which assures lenders that you’re a less risky borrower, and you don’t need to pay for PMI.
How To Lower Your LTV Ratio
There are several ways you can reduce your loan-to-value ratio.
Save for a larger down payment
The most straightforward way to lower your LTV ratio is saving for a larger down payment, which reduces the amount you need to borrow. Putting more money down could also help you avoid PMI and lower your monthly mortgage payment.
Look for less expensive homes
If saving up isn’t an option, choosing a more affordable home could allow you to reach your ideal LTV ratio. A lower price tag could also mean you’ll end up with a mortgage that you can more comfortably afford, which should help with your monthly budget.
Make extra payments
If you’re trying to refinance, paying extra on your current mortgage balance could help you reduce your LTV ratio. However, it’s important to contact your lender to find out its process for this. Some lenders may not allow you to make additional payments without a penalty, and in other cases, you might need to specify that extra payments should be applied to your principal.
What Factors Can Worsen Your LTV Ratio?
From a low appraisal to a decrease in your property value, certain factors can increase your LTV ratio.
Decrease in property value
Home values can change depending on the housing market. If your property depreciates in value, then your LTV ratio could increase as a result. It’s important to keep track of your home’s value, especially if you think you’ll refinance down the line.
Receiving a low home appraisal
As a buyer, getting a low home appraisal can increase your LTV ratio.
“A common mistake when dealing with LTV ratios is overestimating the value of the proposed home being purchased,” says Kevin Garcia, a real estate broker at WLM Financial, an Inglewood, California-based realty company. “From a lender’s standpoint, this can be dangerous waters to be in because suddenly the lender has loaned out money to cover an asset that holds no true value.”
If the appraisal comes back low, the first step is to get a report of the appraiser’s findings from your lender. You can use the report to understand why the appraiser made their decisions. If you feel that the appraisal was too low compared to similar homes in the neighborhood, you can request a reconsideration of value, which allows you to challenge the appraisal results.
Getting a cash-out refinance
A cash-out refinance is one way to unlock your home’s equity to pay for major expenses, such as a college education or home improvements. But taking out cash can also increase your LTV ratio. If you’re considering a cash-out refinance, be sure to crunch the numbers with your lender to understand how much you can afford to take out.
Rolling closing costs into your loan
Rolling closing costs into your mortgage can help you reduce how much you pay upfront to buy a home. But adding to your loan amount increases your LTV ratio. Depending on your situation and goals, it may be best to pay your closing costs upfront instead of adding them to your loan.
LTV Ratio Requirements for Different Types of Loans
There are different types of mortgages designed to help different buyers secure the keys to their new home. Here are the maximum LTV ratio requirements for common types of home loans.
Conventional loans
The maximum LTV ratio requirement for conventional mortgages can vary depending on the lender and the loan. For example, mortgages backed by Fannie Mae have a maximum LTV ratio of 97% for first-time homebuyers, while Freddie Mac caps the maximum LTV ratio at 95%.
FHA loans
For FHA loans, which are backed by the Federal Housing Administration, the maximum LTV ratio requirement is based on your credit score. Those who have a credit score between 500 and 579 are limited to a maximum LTV ratio of 90%. If the buyer’s credit score is above 580, the maximum is 96.5%.
VA and USDA loans
On both VA loans and USDA loans — which are backed by Veterans Affairs and the Department of Agriculture, respectively — qualified borrowers can finance up to 100% of the home’s value. However, they are also subject to additional terms.
For VA loans, borrowers must meet the minimum requirements for the loan, and the sale price cannot exceed the home’s appraised value. In many cases, the maximum loan amount for a purchase with a 100% LTV ratio is $417,000.
For a USDA loan, borrowers can exceed the maximum LTV ratio of 100% only if they add the upfront guarantee fee to their loan.
LTV Ratio vs. Combined LTV Ratio
Your LTV ratio is different from your combined LTV ratio. An LTV ratio only measures the property’s value against your mortgage amount, while a combined LTV ratio includes other loans — like a home equity line of credit, also known as a HELOC — taken out against your equity.
In general, combined LTV ratios are only considered when a buyer is using a second mortgage to purchase their home, or when a homeowner is refinancing. For example, some loans underwritten by Freddie Mac allow qualified borrowers to take out a second mortgage for down payment assistance, closing costs, or renovations.
How Do LTV Ratios Work for Refinancing?
Just like with a new loan application, your LTV ratio is one of the many factors that go into a lender’s decision to approve or deny your mortgage refinance.
If your LTV ratio is high because you haven’t owned your home for long or you’re applying for a cash-out refinance, you might not receive the best terms from your lender — and you may even get denied. But if your credit is good and your LTV ratio is under 80%, a refinance could help reduce your monthly payment, the overall length of your mortgage, or both.
FAQ: What Is an LTV Ratio?
Here are the answers to frequently asked questions about LTV ratios.
Every refinancing situation is different, and homeowners should carefully consider the pros and cons of refinancing with their lender. A rule of thumb is that refinancing with an 80% LTV ratio or less will give you the most options and help you avoid paying for PMI.
When your LTV ratio is significantly above 80%, it can be a disadvantage. With a high LTV ratio, you might not qualify for the best interest rates and loan terms, and your lender may require you to pay for PMI — both of which can increase your monthly costs.
A 75% LTV ratio is considered good for both buying and refinancing a home. An LTV ratio below 80% is an indicator that the borrower is serious about buying a home, and helps ensure that the lender can recover its money in the event of a foreclosure.
The Bottom Line on LTV Ratios
Understanding how LTV ratios can affect your finances and how to calculate LTV ratios is important when you’re trying to get a mortgage or refinance. By working to reduce your overall LTV ratio, you can help unlock your home’s value and grow your wealth.
