Loan-To-Value (LTV) Ratio: Why It Matters
A loan-to-value (LTV) ratio is a measure that compares the size of your mortgage to the value of your property. Lenders may use your LTV ratio to determine your interest rate, monthly payment and how much you can borrow.
What is a loan-to-value (LTV) ratio?
A loan-to-value (LTV) ratio is a financial measurement that compares the size of your mortgage to the value or price of the home you’re buying or refinancing. Lenders use it to gauge a loan’s potential risk: In general, the higher the LTV ratio, the more likely it is the lender might lose money if you default on the loan, and the more likely a lender may have to foreclose on your home.
You may hear a loan officer or loan processor refer to “high-LTV” loans and “low-LTV” loans. A “high-LTV” loan means you’re making a lower down payment. It also means you’re borrowing more money, so your mortgage payment will be higher and you’ll need to prove you have enough income to qualify for the loan. You may even need to prove you have enough cash for a few mortgage payments, which lenders refer to as mortgage reserves.
A “low-LTV” loan means you’re borrowing less while also investing more cash in the home you’re buying. Lenders see that as a plus, and it can lead to a lower interest rate. They may also reward low-LTV borrowers by requiring less income paperwork and, in some cases, waive the need for a home appraisal.
Why your LTV ratio matters
Your loan-to-value ratio is important because it affects the terms of your loan, as well as how difficult or easy it is to get your loan application approved. If you’re trying to decide between a high-LTV and a low-LTV loan, consider the following:
| With a high LTV ratio loan: | With a low-LTV ratio loan: |
|---|---|
| You need less cash for a down payment | You’ll need more cash for a down payment |
| Your monthly mortgage payment is higher | Your monthly mortgage payment is lower |
| You’ll need more income to qualify | You need less income to qualify |
| You’ll pay higher closing costs | You’ll pay lower closing costs |
| You might lose money if you have to sell fast | You’ll have more equity if you have to sell quickly |
| You’ll pay higher mortgage insurance premiums | You may be able to completely avoid paying mortgage insurance |
| You may need to prove you have extra cash reserves to qualify | You’ll have more home equity to tap in the future |
The table below shows the differences between a 95% LTV ratio and an 80% LTV ratio and how both might affect what you have to pay on a 30-year, fixed-rate conventional mortgage for a $250,000 home. The table assumes that your interest rate is 3.75% and that your closing costs are equal to 2% of your loan amount.
| LTV ratio | Loan amount | Down payment | Monthly payment* |
|---|---|---|---|
| 95% | $237,500 | $12,500 | $1,606.93* |
| 80% | $200,000 | $50,000 | $1,309.56** |
*Assumes $3,125 annually for property taxes, $875 annually for homeowners insurance, $123.70 per month for mortgage insurance and $50 monthly for homeowners association (HOA) fees
**Assumes $3,125 annually for property taxes, $875 annually for homeowners insurance and $50 monthly for HOA fees
How the loan-to-value ratio works
Your LTV ratio is easy to calculate: Just divide the amount you’re borrowing by the price or value of your home. This formula is helpful whether you’re buying or refinancing a home, as you’ll see in the examples below:
Purchase LTV ratios.
If you’re buying a house, an LTV ratio can help you determine the most you can borrow, based on both the price of the home and a lender’s loan program. For example, if you’re buying a $300,000 house and are approved for a loan program that has a maximum LTV ratio of 97%, you’d calculate your borrowing maximum this way:
$300,000 sales price x .97 = $291,000 maximum loan amount
Refinance LTV ratios.
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, say $200,000 on a home worth $300,000.
$200,000 current loan balance divided by $300,000 value = 67% current LTV ratio
An LTV ratio can also help you determine how much cash you might be able to take out with a cash-out refinance, which 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. For a home worth $300,000, first determine the maximum amount you might receive with a cash-out refinance loan:
$300,000 value x .80 = $240,000 maximum cash-out loan amount
Assuming your current mortgage balance is $200,000, after you pay off that amount, you’d receive $40,000 in cash to put to some other use, like paying for education expenses or a major home improvement project.
Loan-to-value (LTV) ratio rules for different mortgage programs
Most lenders publish the “maximum” LTV ratio they’ll allow for each loan program they offer. In general, the highest loan-to-value ratios apply only if you’re buying a home or reducing your interest rate without a standard refinancing. If you’re tapping cash from your home’s equity with a cash-out refinance, expect lower LTV ratio maximums.
Here are LTV ratio limits for common types of loans used to either buy or refinance a single-family home:
| Loan program | Loan purpose | Maximum LTV |
|---|---|---|
| Conventional | Purchase | 97% |
| Rate-and-term refinance | 97% | |
| Cash-out refinance | 80% | |
| FHA | Purchase | 96.5% |
| 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 |
More LTV ratio rules to know
Your lender may limit you to a lower LTV ratio if you’re buying or refinancing a rental property, a manufactured home, a two- to four-unit home or a second (vacation) home. On the other hand, 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)
- Your home is worth less than your mortgage balance and you’re eligible for a Home Affordable Refinance Program 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.
LTV vs. combined LTV (CLTV)
You’re likely to spot references to a “combined-loan-to-value (CLTV) ratio” if you’re taking out a home equity loan or a home equity line of credit (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 combined LTV ratio to secure against your home.
Let’s assume you owe $200,000 on a $300,000 house and want to take out a $50,000 home equity loan. Your total loan balance would be $250,000, and your combined-loan-to-value ratio (CLTV) would be about 83% ($250,000 divided by $300,00).
Home loan 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:
- An FHA streamline loan. If you already have an FHA loan insured by the Federal Housing Administration and hope to refinance, you may qualify for an FHA streamline loan, which doesn’t require your home’s value to be verified.
- A VA IRRRL. Military 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).
- A USDA streamline loan. Borrowers who took out a USDA loan backed by the U.S. Department of Agriculture to buy a rural home can lower their payment with a USDA streamline loan that doesn’t require either a home appraisal or an LTV ratio limit.
Tips to lower your LTV ratio
If your LTV ratio seems too high, consider taking one or more of the following steps to lower it while also boosting your home equity:
Ask for a cash gift to help with your down payment.
A family member, employer or friend 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 the LTV ratio faster.
Pick a shorter-term loan.
If your budget can handle a higher monthly payment, a 15-year fixed 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.