What Is Your Loan-To-Value Ratio? Why You Need To Know

A woman sitting at her dining table uses a laptop and calculator to determine her loan-to-value ratio.

Key Takeaways

  • To calculate the loan-to-value ratio on your home, divide the total loan amount by the property's appraised value and express the result as a percentage.

  • Lenders use LTV ratio to assess lending risk. LTV ratios over 80% are considered high-risk. A lender may still approve an application on a property with 80% LTV, but will likely give you a higher interest rate and ask you to buy private mortgage insurance (PMI).

  • If you have a high LTV ratio on your property, conventional loans and mortgages may not be the best option for you. Instead, consider non-debt-based products such as home equity agreements (HEAs). 

Your Loan-to-Value Ratio Affects Your Interest Rates

Do you know how to calculate your loan-to-value (LTV) ratio?

A vast majority of consumers don't, and that can be problematic as this seemingly inconspicuous number can have a significant impact on your ability to take out a mortgage, refinance an existing mortgage, or borrow against your home equity. 

What's more, your LTV can have an even bigger impact on your interest rate.

To learn what a loan-to-value ratio is, how it can affect your creditworthiness, and how to calculate – and improve – yours, keep reading.

What Is a Loan-to-Value Ratio?

A loan-to-value ratio measures the relationship between the amount of a mortgage, home equity loan and/or home equity line of credit, and the property's appraised value. 

To calculate your property’s LTV, take the amount you're looking to borrow, divide it by the appraised value and express the result as a percentage.

Loan-to-value ratio formula

LTV Ratio Calculation Example

Imagine you wanted to buy a home appraised at $100,000. You make a $20,000 down payment and borrow the remaining $80,000. 

$80,000 divided by $100,000 equals 0,8. That gives you an LTV ratio of 80%. 

Why Does Your Loan-to-Value Ratio Matter?

Lenders look at your LTV ratio (among other things) to assess lending risk before approving a loan. 

When you borrow an amount equal to or near the appraised value, you start off with minimal equity in the property. In the event of a foreclosure, that can make it hard for the lender to sell the property for enough to cover the outstanding balance and turn a profit.

That's why loans with high LTV ratios are typically considered high-risk. The lender may still approve an application on a property with a high LTV, but is likely to offer a higher interest rate and, in some cases, ask you to buy PMI to offset the risk. 

The good news is that lenders may make exceptions for borrowers with high LTV ratios if they have low debt, a high income or an extensive investment portfolio.

Your LTV ratio will decrease as you pay down your loan and your home's value grows over time. 

What Is a Good Loan-to-Value Ratio?

Lenders will typically offer their lowest interest rates to applicants with LTV ratios at or below 80%.

If your LTV ratio is over 80%, you may have to pay a higher interest rate and/or purchase PMI. This can cost anywhere between 0.5% and 1% of the total loan amount per year. For instance, PMI with a rate of 1% on a $200,000 loan would cost $2,000 per year, or $166.66 per month. 

How to Lower Your LTV Ratio

The main factors that determine LTV ratio are:

  • Down payment

  • Sales price

  • Appraised value of a property

To decrease your LTV ratio, you can negotiate a lower sales price and/or make a larger down payment. 

For example, if you buy a property that appraises for $100,000 and make a $10,000 down payment, your LTV ratio will be 90% ($90,000/$100,000). If you were to negotiate a $90,000 selling price and make a $20,000 down payment, your LTV ratio would drop to 78% ($70,000/$90,000).

What Is a Combined Loan-to-Value Ratio? 

Lenders use LTV ratios to gauge the level of risk of a single loan. In contrast, a combined loan-to-value (CLTV) ratio measures the relationship between the appraised value of a property and all secured loans on it, including:

  • Primary mortgages 

  • Home equity loans

  • Home equity lines of credit

  • Other liens 

Consider the example above, of the property with an LTV ratio of 78%. Imagine that the property also had a HELOC of $15,000. The CLTV now become much higher.

($70,000 + $15,000) / $90,000 = 94%

Alternatives for Borrowers With High Loan-to-Value Ratios 

If you are looking to buy a house, and your LTV would be more than 80%, you may want to explore some of these alternatives to conventional mortgage loans.

FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration (FHA) and issued by FHA-approved lenders. They typically require smaller minimum down payments and lower credit scores, and accept initial LTV ratios as high as 96.5%. 

FHA loans do require a mortgage insurance premium (MIP) (similar to private mortgage insurance) for the life of the loan. To eliminate this, consider refinancing your FHA loan once your LTV ratio reaches 80%.

Freddie Mac and Fannie Mae Loans

Freddie Mac's Home Possible and Fannie Mae's HomeReady programs allow low-income borrowers with LTV ratios as high as 97% to secure mortgages. However, you'll need to buy mortgage insurance until your LTV ratio drops to 80%.

VA and USDA Loans

If you're current or former military personnel, or live in a rural area, you may be eligible for a loan from the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). You may qualify even with an LTV ratio of 100%, and there's no PMI requirement. However, both loan types have additional fees.

Maximum loan-to-value ratios by home loan type

Some homeowners looking to buy another property may be facing high LTV ratios on the new property. If you have accumulate equity in your current home, consider looking into a home equity agreement. This type of agreement enables you to tap into your equity and obtain cash without taking out a new loan. 

Learn more about Unlock’s home equity agreements.