Loan-to-Value (LTV) Ratio - Overview & Examples

The euphoria of being ready to buy your first home is quickly washed away when you start trying to navigate the complex terms and calculations associated with getting approved for your loan.

While you'll come across a range of acronyms, understanding the term loan-to-value (LTV) ratio is essential to help you compare mortgage options and understand how lenders evaluate risk. So, what exactly is LTV?

Keep reading to learn more about this crucial metric that directly impacts your mortgage options.

TLDR Key Takeaways

• In a nutshell, a loan-to-value ratio is a financial measurement that compares your home's value versus the total amount of your loan.
• The lower your LTV, the happier lenders are because it means you have more equity in the property.
• For many conventional loans, private mortgage insurance is generally required when your LTV is above 80%, according to the Freddie Mac Seller/Servicer Guide.

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

A loan-to-value ratio calculates the relationship between a loan amount and the appraised value of a property. In other words, it helps lenders determine whether or not the borrower has enough equity in the property to use as collateral to secure the loan.

It's just another way for mortgage lenders to ensure their investment is protected should the borrower run into financial difficulties during repayment.

Loan-to-value ratios come into play when buying a house, refinancing a current mortgage, or borrowing against a property's equity.

The higher the LTV, the riskier the loan is to the lender because if something happens to the borrower, the lender may need to resell the property to recoup its money. An unfavorable change in market prices can make this more difficult.

On the other hand, a lower LTV is viewed as less risky, which often results in better borrowing terms. But what exactly constitutes a low LTV? Generally speaking, LTVs of 80% or less are commonly viewed as lower risk.

Pro Tip: Down payments, sales prices, and appraised values all affect your overall LTV ratio. Higher down payments and lower sales prices result in a lower LTV ratio.

How LTV Affects Your Mortgage

While several factors like your credit score, income, and debt-to-income (DTI) ratio influence your eligibility for a mortgage, your LTV also plays a critical part in the lender's underwriting process.

As we mentioned before, most lenders tend to favor borrowers with a low LTV and may offer more competitive terms. That doesn't mean higher-LTV programs are unavailable, but they can come with more stringent requirements.

On top of having to jump through additional hoops, borrowers looking to secure a loan with a higher LTV will typically have:

• Higher Interest Rates: Higher-LTV loans can be priced as riskier, so rates or fees may be higher depending on the program and borrower profile.
• Private Mortgage Insurance (PMI): For many conventional loans, PMI is generally required when the LTV is above 80%, according to the Freddie Mac Seller/Servicer Guide.
• Limited Options: Borrowers may only have access to a smaller number of repayment options and terms.
• Difficult Approval Process: Lenders will want to review your finances closely to evaluate your ability to repay the loan, and they may require additional documentation depending on the program.

If you want to get the best terms and rates available to you, you'll generally want to try to lower your LTV.

How to Calculate Your Loan-to-Value Ratio

To calculate your LTV, you'll need to divide the loan amount by the value of the property or asset. The formula below represents the equation:

LTV = (Mortgage Amount (MA) ÷ Appraised Property Value (APV)) x 100

For example, if you were looking to buy an investment property worth $500,000 and secured a loan for $400,000, your LTV would be 80%. Here's how that would look:

LTV (80%) = (MA ($400,000) ÷ APV ($500,000)) x 100

What Is a Good LTV?

The lower your LTV ratio, the better. In practice, many loan programs treat 80% LTV as an important threshold because mortgage insurance rules and pricing often change above that level. With an 80% LTV or less, you may improve your chances of a successful application and may qualify for better pricing.

Quick Tips to Improve Your LTV Ratio

Making smart financial decisions is key to improving your LTV and gaining better access to more favorable mortgage options. Here are a few quick tips to help you improve it:

Maximize Your Down Payment

Your down payment directly influences your LTV. The more money you have to put down, the lower your LTV will be.

Try to set aside as much money as possible each month into savings so that you can increase the amount of money available to use as a down payment.

Wait for the Market to Change

We all know that the housing market fluctuates from year to year, even season to season. Paying attention to market trends can help you decide when the best time to start house hunting is.

If prices fall or inventory improves, you may be able to buy with a lower LTV and more favorable terms.

Pay Down Existing Debt

High levels of debt can make it harder to save for a down payment. Try to pay down or eliminate outstanding debt so you can free up money to apply to a down payment.

Make Extra Payments on Your Principal

If you're looking to refinance your home, you'll want to make sure you lower your LTV before reaching out to your lender. Remember, as you reduce your principal balance, your LTV ratio may decrease if your property value holds steady or rises. An extra payment toward principal can help reduce your balance faster.

Different Types of LTV Rules

When it comes to LTV ratio requirements, different loan types may have different rules.

FHA Loans

These mortgages, facilitated by FHA-approved lenders and insured by the Federal Housing Administration, can offer a lower down payment option for qualified borrowers.

FHA-insured purchase loans allow a maximum loan-to-value ratio of 96.5% for borrowers who meet FHA requirements, according to HUD.

FHA loans also require mortgage insurance. Whether it lasts for the life of the loan or for a shorter period depends on factors such as the original LTV and loan term, according to HUD's mortgage insurance guidance.

VA and USDA Loans

Eligible service members, veterans, and certain rural homebuyers may have access to VA and USDA loan programs.

These programs do not use conventional PMI, but they can include other upfront or annual fees depending on the program. For example, the VA funding fee and the USDA guarantee fee structure may apply.

Fannie Mae and Freddie Mac

Some conventional affordable lending programs support down payments as low as 3%, which can result in 97% LTV financing for qualified borrowers. See Fannie Mae HomeReady and Freddie Mac Home Possible.

For many conventional loans sold to Fannie Mae or Freddie Mac, mortgage insurance may be canceled once borrower-request and automatic termination rules are met under the CFPB's summary of the Homeowners Protection Act.

Refinance options and high-LTV relief programs change over time, so borrowers considering a refinance should confirm current availability and eligibility with their lender and the relevant agency or GSE guidance.

What's the Difference Between LTV and Combined LTV (CLTV)?

LTV and CLTV are tools for assessing the financial implications of mortgages on a property. LTV measures the impact of a single mortgage loan on a property, while CLTV takes into account all loans that are secured by that same property, including:

• Primary mortgage
• Second mortgage(s)
• Home equity loan(s)
• Lines of credit
• Other liens

By measuring individual loan values, as well as all outstanding loans secured by the property, these ratios can help lenders evaluate risk when a borrower has more than one loan.

For example, if they have multiple mortgages and a home equity loan or line of credit (HELOC), the CLTV may indicate too much risk.

While 80% and above is a common CLTV benchmark, some lenders may be more flexible, although they will most likely have stronger qualifying standards for borrowers to meet.

Flexible Lending Options for Many LTV Scenarios

With so much jargon and so many terms associated with mortgages, it can be easy to get overwhelmed with the process. One wrong move could cost you money in fees or interest over time, or even cause you to miss out on a home you wanted.

But it doesn't have to. With the right partner, you can navigate the mortgage application process and explore financing options for your home purchase or refinance.

At Modern Day Lending, we make it our mission to provide personalized loan assistance so you can compare options based on your LTV, goals, and financial profile. We'll help you evaluate your choices and determine which may be best suited to your needs.

Our two decades of experience and wide-ranging network of investors and financial institutions enable us to provide customized mortgage solutions for individuals from all walks of life, from entrepreneurs and self-starters to seasoned investors.

Schedule a consultation with our mortgage experts to discuss loan options that fit your specific needs.