What Is the Loan-to-Value (LTV) Ratio and Why Does It Matter?

When you apply for a mortgage or any property-backed loan, one of the first numbers a lender looks at is the loan-to-value (LTV) ratio. It plays a major role in determining whether you qualify, the interest rate you receive, and the overall terms of your loan. Yet many borrowers are not fully aware of what LTV means—or how much influence it has over their costs and options.

This article explains what the LTV ratio is, how it is calculated, why it matters to lenders and borrowers, and how you can improve it.

What Is the Loan-to-Value (LTV) Ratio?

The loan-to-value ratio (LTV) measures how much of a property’s value is being financed with a loan. It compares the loan amount to the appraised value or purchase price of the property.

LTV Formula

[
\text{LTV} = \frac{\text{Loan Amount}}{\text{Property Value}} \times 100
]

For example:
If you buy a home worth $400,000 and take a $320,000 mortgage, your LTV is:

[
\frac{320,000}{400,000} = 0.80 = 80%
]

Why It’s Important

LTV tells the lender how much of the property you own (equity) versus how much is financed. The higher the LTV, the smaller the borrower’s equity and the greater the risk to the lender if the loan goes into default.

How Lenders Use LTV

Lenders use LTV to make key decisions about:

• Loan approval

• Interest rates

• Required down payment

• Eligibility for refinancing

• Mortgage insurance requirements

A lower LTV generally means less risk for the lender—so borrowers with low LTV often receive more favorable loan terms.

Why LTV Matters: Key Reasons

1. It Determines Eligibility

Most lenders have maximum allowable LTVs for different loan types. For example:

• Conventional loans typically allow up to 80–97% LTV depending on conditions.

• FHA loans often allow up to 96.5%.

• VA loans may allow up to 100% (no down payment required in many cases).

• Investment property loans usually require a lower LTV, often 70–80%.

If your LTV is too high, you may be denied or asked to make a larger down payment.

2. It Affects Your Interest Rate

Higher LTV = higher perceived risk.
Higher risk = higher interest rates.

Borrowers with low LTV ratios usually qualify for:

• Lower interest rates

• Fewer fees

• Better loan programs

Even a few percentage points difference can translate to tens of thousands of dollars over the life of a mortgage.

3. It Influences Required Mortgage Insurance

If your LTV is above certain thresholds, you may be required to buy mortgage insurance, which protects the lender if you default.

Examples:

• On conventional loans, private mortgage insurance (PMI) is usually required if LTV > 80%.

• FHA loans require mortgage insurance premiums (MIP) regardless of LTV.

• VA loans use a funding fee instead of monthly mortgage insurance.

A lower LTV can help you avoid these extra insurance costs.

4. It Shapes Loan Terms and Options

Your LTV can affect:

• Available loan products

• Maximum loan amount

• Fixed vs. adjustable-rate options

• Eligibility for special programs (first-time buyer loans, interest-only loans, jumbo loans, etc.)

Lenders reserve their best and most flexible loans for borrowers whose LTV signals lower risk.

5. It Matters for Refinancing

When refinancing, your current home equity—and therefore your current LTV—determines:

• Whether you’re eligible

• What rate you’ll get

• Whether cash-out refinancing is possible

For example, cash-out refinancing often requires an LTV of 80% or lower. If home values drop or your mortgage balance is high, you may not qualify.

Examples of LTV in Real-World Scenarios

Scenario 1: Buying a Home With a 20% Down Payment

• Home price: $500,000

• Down payment: $100,000

• Loan amount: $400,000

LTV = 400,000 ÷ 500,000 = 80%

Result:

• Likely no PMI

• Competitive interest rates

• Strong borrowing profile

Scenario 2: Minimum Down Payment for First-Time Buyers

• Home price: $300,000

• Down payment: 3% = $9,000

• Loan amount: $291,000

LTV = 291,000 ÷ 300,000 = 97%

Result:

• Higher monthly payments

• PMI required

• Higher rates compared to lower-LTV borrowers

Scenario 3: Cash-Out Refinance

• Property value: $600,000

• Existing mortgage: $360,000

• Requested cash-out: $40,000

New loan amount: $400,000
LTV = 400,000 ÷ 600,000 = 67%

Result:

• Well within most lender limits

• Access to equity with favorable terms

What Is a “Good” LTV Ratio?

“Good” is relative to the loan type, but in general:

• Below 80%: Excellent — qualifies for best rates and avoids PMI

• 80–90%: Acceptable — may require insurance

• 90–97%: Higher risk — allowed for some conventional and FHA programs

• >97%: Rare for mortgages, except certain government-backed loans

The lower the LTV, the stronger your borrowing position.

Factors That Affect LTV

1. Down Payment Size
   Larger down payments lower the LTV immediately.

2. Appraised Property Value
   Higher appraisals reduce the LTV; lower appraisals can increase it.

3. Loan Amount
   Bigger loans raise the LTV; smaller loans reduce it.

4. Market Conditions
   Rising home prices lower your LTV over time, while declining values raise it.

Why LTV Matters to Borrowers

Understanding LTV helps borrowers:

• Estimate realistic loan amounts

• Plan their down payment

• Understand why lenders approve or deny their applications

• Reduce borrowing costs

• Build equity faster

A borrower who knows how LTV works can make smarter decisions about when to buy, refinance, or use home equity.

How to Improve or Lower Your LTV Ratio

If your LTV is too high, several strategies can help:

1. Increase Your Down Payment

Even a small increase can reduce your LTV and potentially eliminate PMI.

2. Choose a Less Expensive Property

Buying within your budget improves LTV—and monthly affordability.

3. Improve Property Value

Renovations or strategic upgrades can raise your home's appraisal value.

4. Pay Down Principal Before Refinancing

Making extra payments helps reduce your balance, lowering LTV over time.

5. Wait for Market Appreciation

If home values are rising, waiting may improve your LTV naturally.

LTV vs. CLTV vs. HCLTV (Related Metrics)

Lenders may also consider:

CLTV (Combined Loan-to-Value)

Includes all loans secured by the property, such as a second mortgage or HELOC.

HCLTV (High Combined Loan-to-Value)

Uses the maximum line of credit available (not just what’s drawn) on a HELOC.

These ratios provide a more complete picture of borrowing risk.

The Bottom Line

The loan-to-value (LTV) ratio is one of the most important factors lenders use when evaluating a mortgage or property-backed loan. It tells them how much of the property’s value is being financed and plays a major role in determining eligibility, interest rates, required insurance, and overall loan terms.

For borrowers, understanding LTV is essential. A lower LTV can save money, improve loan options, and strengthen long-term financial health. By planning your down payment, monitoring property value, and managing home equity wisely, you can use LTV to your advantage and secure better borrowing opportunities.