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.
Mar 17, 2022

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The loan-to-value ratio is one of the key elements lenders consider when you apply for a mortgage, mortgage refinance or home equity loan or line of credit. Generally, a lower LTV will mean less risk for the lender and a lower monthly payment.

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What is LTV?

The LTV — short for loan-to-value — ratio is the ratio of the mortgage balance to the value of the property. To calculate loan to value, divide your mortgage amount by the value of the property you own or want to buy, or use a simple loan-to-value calculator.

For example: Say a house is valued at $400,000, and the mortgage totals $360,000.

The loan to value would be 90%: $360,000 / $400,000 = 0.9.

What is CLTV?

CLTV, or combined loan to value, comes into play when there's more than one loan secured by the property; for instance, a primary mortgage plus a second mortgage, such as a home equity loan or line of credit. The CLTV is the combined balance of all the mortgage debt divided by the property value.

Lenders will consider the CLTV when you apply for mortgage refinancing or a home equity loan or line of credit.

For example: On a property worth $400,000, say the balance of your first mortgage is $200,000, and you want a $40,000 home equity loan.

The CLTV would be 60%: $240,000 / $400,000 = 0.6.

Generally, for home equity loans and lines of credit, lenders require the combined loan to value to be less than 80% or 85%. Some lenders cap it at 90%.

What is a good LTV?

A good LTV is one that allows you to qualify for a mortgage with a monthly payment you can afford.

The maximum LTV allowed to purchase a home or refinance varies by lender and the type of mortgage. Here's a look at the LTV requirements for the four main types of home loans.

Conventional loans

Some conventional loans require down payments as low as 3%, or an LTV of 97%. But 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%. FHA mortgages require the borrower to pay for FHA mortgage insurance; the insurance cost is built into the loan.

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, which 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 rural home buyers. Instead of requiring mortgage insurance, USDA loans include a one-time upfront guarantee fee and an annual fee paid through the life of the mortgage.

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Is it better to have a higher or lower LTV?

With a lower LTV, you'll appear less risky to lenders than with a higher LTV, which could help you qualify for a lower interest rate. And if your LTV is 80% or lower, you can avoid paying for mortgage insurance.

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