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What Is LTV? Why Loan-To-Value Ratio Matters

The maximum loan-to-value ratio allowed for a mortgage depends on the type of home loan and the lender's requirements.

Barbara Marquand
Bella Angelos
Chris Jennings
Michelle Blackford
Updated
The loan-to-value ratio, or LTV, measures the size of your mortgage relative to your property's value. It’s one of the key factors lenders consider when you apply for a mortgage, mortgage refinance, home equity loan or line of credit (HELOC). LTV is one way that lenders assess risk. Generally, lenders consider a lower LTV to be safer, which means that a comparatively low LTV could help you qualify for a lower interest rate.
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How mortgage lenders use LTV

Loan-to-value ratio is one element mortgage lenders look at as they evaluate your finances and consider the terms on which they'll approve your home loan. The lower your loan-to-value ratio is, the less risky you seem to a lender because you've got more equity.
Home equity is the part of the home that you own — the property's value minus the amount you still owe. Having a lower LTV could help you score a lower interest rate.
» MORE: Ways to get a lower mortgage rate
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LTV requirements by loan type

The maximum LTV allowed to purchase a home or refinance varies by lender and the type of mortgage. For government-backed loans and conventional loans, lenders must follow set federal rules on LTV. For other loan types, like jumbo loans or non-QM loans , lenders set their own limits. Here's a look at the LTV requirements for the four main types of home loans.

Conventional loans

Some conventional loans only require down payments as low as 3%, or an LTV of 97%. The trade-off? Typically you'll need to pay for private mortgage insurance , or PMI, on a conventional loan with an LTV higher than 80%. To avoid PMI, make a down payment of 20% or more when buying a home.

FHA loans

Backed by the Federal Housing Administration, FHA loans require a down payment as low as 3.5%, or an LTV of 96.5%.
Borrowers with credit scores between 500 and 579 must put down at least 10% on an FHA loan though. For these borrowers, the required LTV is 90% or less.
The size of your down payment determines how long you must pay for FHA mortgage insurance. If you put down less than 10%, you have to refinance to a different type of loan to get rid of it; if you put down 10% or more, the insurance automatically drops off after 11 years.

VA loans

VA loans for active and veteran military members require no down payment, so the LTV can be 100%. VA loans, which are backed by the U.S. Department of Veterans Affairs, include a one-time funding fee that can be paid upfront or rolled into the loan.

USDA loans

Like VA loans, USDA loans don't require a down payment, so the LTV can be as high as 100%. Backed by the U.S. Department of Agriculture, USDA loans are for buyers in rural and select suburban areas. USDA loans don’t require mortgage insurance. Instead, they charge a one-time upfront fee and an annual fee for the life of the loan.
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What's a good loan-to-value ratio?

A good loan-to-value ratio meets the requirements of the type of home loan you want and allows you to meet your homeownership goals.
For example, you might target 80% LTV because you're trying to get the lowest interest rate you can, plus avoid paying PMI on a conventional loan. That monthly savings might outweigh the hardship of having to save up a hefty down payment .
On the other hand, you might reason that a 20% down payment isn't feasible on your timeline, plus PMI isn't forever — it can be canceled once you have sufficient equity. You can focus on other areas, like credit score and debt-to-income ratio , to get the best possible interest rate offers. And if prevailing interest rates drop, you can refinance .
No-down-payment loans have real benefits, but a very high LTV also comes with risks.Because you didn't make a down payment, you're starting out with no equity in the home. And thanks to amortization growing your equity may be a slow process.
With lower equity, you're at higher risk if the home were to decrease in value. You could potentially end up owing more money than the home's worth.
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How to lower your loan-to-value ratio

Lowering your loan-to-value ratio may be easier said than done. You've got two options, both of which amount to borrowing less: either come up with a larger down payment or look for a less expensive property.
If you're looking at LTV for a refinance or a second mortgage, it's the same idea. Try to chip away at your principal with extra payments to pay off your mortgage faster and bring down the amount you owe. Keep an eye on home values in your area. If your home's value goes up as you keep making payments, the numbers could tilt to your advantage.
» MORE: Find a top-rated mortgage refinance lender
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