LTV: Loan-to-Value Ratio Explained
A loan-to-value (LTV) ratio is the number that shows the difference between what you owe on your mortgage and the value of your home.
Knowing your LTV can better prepare you for a home purchase or refinance. When you borrow money to buy a home or refinance your mortgage, lenders will compare the amount you’re borrowing against the value of the property. That percentage helps determine which type of loan you can get and what your interest rate will be.
How to Calculate LTV
LTV is calculated by dividing the loan amount by the appraised value of the property. Here’s an example that illustrates how LTV is calculated.
Loan amount/property value = LTV
Appraised property value: $200,000
Loan amount: $180,000
$180,000/$200,000 = 0.9
How Does a Down Payment Impact Your LTV?
When buying a home, you can lower your LTV by increasing your down payment. Here’s an example of how a larger down payment can decrease your LTV.
Appraised property value: $200,000
Down payment: $50,000
Loan amount: $150,000
$150,000/$200,000 = 0.75
How Does Your Equity Impact Your LTV?
As you make mortgage payments and your property value increases, you’re building equity, lowering your LTV. Here’s an example of how equity can impact your LTV.
Property value: $200,000
Loan balance: $125,000
$125,000/$200,000 = 0.625
How Does a Decrease in Property Value Impact the LTV?
Your property can decrease in value if the home is not maintained over time, or if the housing market drops dramatically. When this happens, your LTV rises. Here’s an example of how a decreased property value can affect your LTV.
Original purchase price: $200,000
Property value: $150,000
Loan balance: $175,000
$175,000/$150,000 = 1.166
When your home loan balance is higher than the value of your home, it’s referred to as being “underwater.” This means you owe the lender more than the value of your home, and it’s a situation you want to avoid by paying your mortgage consistently and researching the value of comparable homes in the same area.
What's a Good LTV?
An LTV of 80% or lower is an ideal target – not only does this mean you you’ll be eligible for preferable loan options with better rates, but you can avoid paying mortgage insurance, saving you hundreds on your mortgage payments.
An LTV higher than 80% generally means you’ll have to pay for mortgage insurance. Mortgage insurance allows the lender to lend you the money to buy or refinance your house while protecting the lender in case you default on the loan.
When you’re buying a home or refinancing, there are ways your LTV can improve.
How to Improve Your LTV When Buying a Home
When buying a home, making a larger down payment will lead to a lower LTV. Lenders and mortgage investors take your down payment as one indicator of the risk involved in your loan. From a lender’s perspective, when home buyers invest more of their own funds upfront, lenders will see them as serious and invested borrowers.
If you’re unable to make a larger down payment, (let’s say you have a fixed amount of money to spend) the other option is to focus on less expensive homes. This will lower your LTV and might help you get a more preferable loan option.
For example, if you know you only have $10,000 to use toward a down payment, this is how the price of a home can lower your LTV:
Home 1 Purchase Price: $150,000
Home 1 Down Payment: $10,000
Home 1 Loan Amount: $140,000
Home 1 LTV: 93%
Home 2 Purchase Price: $100,000
Home 2 Down Payment: $10,000
Home 2 Loan Amount: $90,000
Home 2 LTV: 90%
How to Improve your LTV When Refinancing
When you own a home, there are a few ways your LTV can improve:
- Making your regular mortgage payments. This will lower your principal balance (the amount you borrowed) and build your equity.
- Completing home improvement projects. For example, renovating your kitchen can add value to your home, lowering your LTV.
- The housing market shifts. Based on your home’s location and how many people are interested in buying a home, your property value could increase, leading to a lower LTV.
With a lower LTV, you may qualify for a home loan that you weren’t eligible for when you purchased your home. It could be time to refinance your mortgage to improve your interest rate, take cash out or eliminate PMI.
How LTV Affects Your Loan Options
Here are some examples of how your LTV plays a role determining what type of mortgage you are eligible for.
Conventional loans, like a 30-year fixed or 15-year fixed, are mortgages that are not backed by a government agency like the FHA or VA. These loans require borrowers to have a credit score of at least 620 and a debt-to-income ratio (DTI) no higher than 50%.
You can qualify for a conventional loan with an LTV of 97%, requiring as little as a 3% down payment. However, by making a down payment of 20% or more, you can avoid paying PMI. This can save you hundreds of dollars on your mortgage payments.
FHA loans are home loans backed by the Federal Housing Administration. They require a credit score of 580 or higher to qualify.
FHA loans are great for borrowers that have an LTV of 96.5% or lower because they require as little as 3.5% down payment. The smaller down payment means you’ll be required to pay mortgage insurance, which you can remove by refinancing to a conventional loan after you have 20% equity in your home.
By having less stringent qualifications and allowing lower down payments, FHA loans are a great choice for first-time home buyers or home buyers with less-than-ideal credit.
VA loans are backed by the Department of Veterans Affairs and are only available to eligible veterans, active duty service members and their surviving spouses.
Compared to other home loan options, VA loans make it easier to buy or refinance a home. VA loans are available with an LTV of 100%, allowing service members to buy a home with zero down or refinance the full value of their home.
Our VA Guide explains how VA loans work and how you can apply for one.
LTV Is Just One Factor
Remember, your LTV is only one piece of your mortgage application when you are buying a home or refinancing. Understanding your LTV can help you determine if you’re ready to get a mortgage and show you what home loans are available to you.