Loan-To-Value (LTV) Ratio: What You Need to Know

5 Min Read | Published: May 29, 2024

A couple sitting on a dining table with a laptop and discussing about loan to value ratio

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Gain insights into the loan-to-value (LTV) ratio and its impact on mortgage terms and eligibility. Plus, learn ways to lower your LTV ratio.

At-A-Glance

The loan-to-value (LTV) ratio measures your mortgage balance against the appraised value of a home.
In some cases, a high LTV ratio could lead to a higher mortgage rate or disqualify you from mortgage eligibility.
To lower your LTV ratio, consider making a larger down payment or choosing a more affordable home.

If you’re applying for a mortgage, your loan-to-value (LTV) ratio is an important consideration. In some cases, it could be a deciding factor in whether you qualify for a mortgage. In this article, we’ll explore the concept of LTV, its importance, and strategies for lowering your LTV.

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

The LTV ratio compares the appraised value of the property you hope to buy against your mortgage balance. It helps lenders determine whether to approve you for a mortgage and what terms to offer you.

When it comes to your LTV, lower is typically better. A higher LTV is typically considered riskier, whereas a lower LTV increases your chances of getting approved and qualifying for a competitive interest rate. The specific LTV requirement for a mortgage will depend on the type of loan you want to take out as well as your financial situation.¹

How to Calculate Your Loan-to-Value (LTV) Ratio

To calculate your LTV ratio, divide your mortgage balance by the appraised value of your home and multiply that value by 100.

For example, imagine you owe $150,000 on your mortgage and your property is worth $300,000. In this case, your LTV ratio would be 50% ($150,000/$300,000 X 100). Note that you can use an online valuation tool to estimate your home’s value, though to find your actual LTV ratio you’ll need to get a professional home appraisal.

How to Lower Your LTV Ratio

A lower LTV ratio may increase your chances of getting approved for a mortgage with a competitive rate and favorable terms. The following strategies could help you lower your LTV.²

Make a Larger Down Payment
The more money you put down on the home you wish to buy, the lower your LTV ratio will become. Depending on your situation, it may be worthwhile to save for a longer period of time and delay your house purchase so you have a larger down payment and a better mortgage offer.
Choose a More Affordable Home
You may want to consider a less expensive home. This way, your downpayment will represent a larger percentage of the loan, helping to lower your LTV.
Choose a Shorter Term
Many people opt for 30-year mortgages. However, if your budget allows for a higher monthly payment, a 15-year or 20-year mortgage will lower your LTV ratio faster as you make regular monthly payments.
Pay Down Your Balance
Your LTV ratio will go down as you make your monthly mortgage payments. If you want to see a lower ratio sooner rather than later, you may want to make additional payments or allocate extra money from bonuses or gifts toward your balance.

Did you know?

If you want to take out a conventional mortgage, an LTV ratio of 80% or less could help you avoid private mortgage insurance (PMI).³

Mortgage Programs for Low-Income Buyers

While most mortgages require a lower LTV ratio, not all do. If you’re struggling to make the downpayment, you may want to consider a different mortgage program. Two options are:

These mortgage programs are designed to help low-income borrowers. These programs allow an LTV ratio of 97%. Keep in mind, however, that they require PMI until the ratio falls to 80%.⁴

Frequently Asked Questions

The combined LTV ratio measures the sum of all secured loans on a house divided by its appraised value. For example, if you take out a home equity loan or home equity line of credit (HELOC), you’ll have a combined LTV ratio.⁵

While it varies by lender and loan type, any figure above 80% is typically considered a high LTV ratio. A high LTV ratio may mean that you have to pay for PMI or settle for a higher interest rate.⁶ In some cases, you may not be approved for the mortgage.

An 80% LTV means that you owe 80% of your home’s appraised value. When buying a home, it’s advisable to have an LTV of 80%, or lower.⁷

The Takeaway

If you’re in the market for a mortgage, the loan-to-value (LTV) ratio is important to understand. LTV compares the size of a mortgage to the appraised value of a home. A low LTV can help you to get approved for a loan and may help you secure a better interest rate as well.

^1,2,7 “What Is Loan-To-Value (LTV) Ratio And How To Calculate It,” Forbes

³ “What Is a Loan-to-Value (LTV) Ratio?,” Experian

⁴ “Loan-to-Value (LTV) Ratio: What It Is, How to Calculate, Example,” Investopedia

^5,6 “What Is Loan-to-Value and Why Does it Matter?,” U.S. News

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Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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