What Is Loan-to-Value (LTV) Ratio and How Is It Calculated?

When applying for a mortgage, one of the most important factors lenders consider is your Loan-to-Value ratio, or LTV. At Equity Capital Home Loans, we help our clients understand this crucial metric because it plays a significant role in your loan eligibility, down payment requirements, and even your interest rate.

What Does Loan-to-Value Ratio Mean?

The Loan-to-Value ratio expresses how much you're borrowing compared to the appraised value or purchase price of a property—whichever is lower. In simpler terms, it shows what portion of the home’s value is financed by your mortgage.

If a lender allows an 80% LTV, you can borrow up to 80% of the home’s value, and the remaining 20% becomes your down payment.

LTV Formula:

LTV = (Loan Amount ÷ Home Value) × 100

Why LTV Ratio Matters

Lenders use LTV to evaluate how much risk is involved in lending to you. The higher the LTV, the more risk a lender assumes. A lower LTV typically means you're putting more of your own money into the purchase, which signals lower risk to lenders—and may result in better mortgage terms.

LTV vs. Combined Loan-to-Value (CLTV)

The Combined Loan-to-Value ratio (CLTV) expands on the standard LTV by including all loans tied to the property, such as:

• A primary mortgage
• A home equity loan
• A home equity line of credit (HELOC)

If you’re considering tapping into your home’s equity, lenders will often assess your CLTV to ensure your total borrowed amount doesn’t exceed lending limits.

What Is Considered a Good LTV Ratio?

A lower LTV is generally better from a lending perspective. While different mortgage types have different thresholds, staying at or below 80% LTV often means:

• You’ll avoid Private Mortgage Insurance (PMI) on conventional loans
• You may qualify for lower interest rates
• You’ll have a better chance at loan approval

LTV Ratio Example

Let’s break it down:

Home Purchase Price: $420,000
Loan Amount (97% LTV): $407,400
Down Payment Needed: $12,600

In this case, you’d need to cover 3% of the home’s value out-of-pocket, and PMI would likely apply until you reach 20% equity.

Now, if you can pay 20% down—$84,000—your LTV drops to 80%, eliminating the need for PMI and potentially qualifying you for a better interest rate.

How to Calculate Your Loan-to-Value Ratio

For New Home Purchases:

1. Subtract your down payment from the purchase price.
2. Divide the loan amount by the home’s price.
3. Multiply by 100.

Example:
Home Price = $350,000
Down Payment = $25,000
Loan Amount = $325,000

LTV = (325,000 ÷ 350,000) × 100 = 92.8%

For Refinancing:

Divide your new loan amount by the current appraised value of your home.

Example:
Home Value = $400,000
New Loan Amount = $350,000

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LTV = (350,000 ÷ 400,000) × 100 = 87.5%

Maximum LTV Ratios by Loan Type

LTV limits can vary depending on the loan product. Here's how different types stack up:

Conventional Loans

• Fixed-Rate Loans: Up to 97% LTV
• Adjustable-Rate Mortgages (ARMs): Up to 95% LTV
• PMI required if LTV > 80%

FHA Loans

• Max LTV: 96.5% (with credit score ≥580)
• If credit score is between 500–579, the max LTV drops to 90%

VA Loans (Backed by the Department of Veterans Affairs)

• Max LTV: 100% (No down payment required!)
• Exclusive to eligible veterans, active-duty members, and surviving spouses

USDA Loans

• Max LTV: 100%
• Designed for rural and suburban homebuyers

Fannie Mae HomeReady & Freddie Mac Home Possible

• Both allow up to 97% LTV
• Ideal for low- to moderate-income borrowers

How to Lower Your LTV Ratio

Lowering your LTV makes your loan application stronger. Here's how:

1. Make a Larger Down Payment

Even a small increase in your down payment can significantly improve your LTV and help you avoid PMI.

2. Buy a More Affordable Home

Shopping within a slightly lower price range increases the impact of your down payment and reduces the loan amount needed.

3. Increase Your Home's Appraised Value (When Refinancing)

If your home has appreciated since you purchased it, your LTV may drop automatically—improving your refinance options.

Why Lower LTVs Mean Better Mortgage Deals

Lenders see a lower LTV as less risk. That usually means:

• Lower interest rates
• Better loan terms
• More flexible underwriting
• No or reduced PMI

Over time, even a slight reduction in your interest rate can save you tens of thousands of dollars.

Start Your Homeownership Journey with Equity Capital Home Loans

At Equity Capital Home Loans, we help homebuyers and homeowners across California find the right mortgage—whether you're purchasing, refinancing, or tapping into your equity. Let us help you understand your Loan-to-Value ratio and how it fits into your overall mortgage strategy.

Get a personalized LTV assessment and loan quote today!

Frequently Asked Questions (FAQs)

1. What is a good LTV ratio for first-time homebuyers?

A good LTV for first-time buyers is typically 80% or lower, but many first-time homebuyer programs (like FHA or HomeReady) allow higher LTVs up to 96.5% or 97%.

2. Does a lower LTV always mean no PMI?

Generally, if your LTV is 80% or less on a conventional loan, you can avoid PMI. However, this does not apply to FHA loans, which require mortgage insurance regardless of LTV.

3. Can I refinance if my LTV is high?

Yes, but your options may be limited. Some programs like FHA Streamline or VA IRRRL may still be available. A lower LTV generally results in better refinance terms.

4. What happens if my LTV is over 100%?

This is considered underwater, where your mortgage is more than your home’s value. You may need a specialized refinance program or consider working with your lender for options.

5. Does my credit score affect my LTV?

Not directly. However, your credit score can impact the loan programs you qualify for, which may have different LTV limits.