Loan-To-Value (LTV) Ratio

Loan-to-value (LTV) ratio summary:

• Loan-to-value (LTV) ratio is the percentage of your home’s value that is financed by a mortgage. 

• A lower LTV ratio is less risky for a mortgage lender. 

• Typically, a conventional mortgage allows a maximum LTV ratio of 97%.

Loan-to-value (LTV) ratio definition and meaning

An LTV ratio is the percentage of the home’s value that you want to finance. The more of your own money you use toward the home, the lower the LTV. Lower LTVs are less risky for the lender. 

LTV example: You have $50,000 for a down payment and you want to buy a $300,000 home. The loan is 250,000. The value is $300,000. This LTV is about 83.3%. 

$250,000 / $300,000 = .833

Key concept:

To calculate your home’s LTV ratio, a lender divides the loan amount by the property's appraised value. 

More about loan-to-value ratio 

Imagine you’re applying for a mortgage. Your lender considers several factors, including the loan-to-value (LTV) ratio. The LTV ratio compares the size of the mortgage you need to the value of the home you hope to purchase. 

Loan-to-value ratio: a comprehensive breakdown 

Let’s say you apply for a mortgage on a $300,000 home but you only have $4,000 to put down. Here are the steps for the LTV calculation. In our examples, we assume that the purchase price is the same as the home’s appraised value:

1. Subtract the down payment from the home’s value

2. Divide the loan amount by the home’s value

3. Multiply that number by 100 to reach the LTV

Here’s the math on those steps:

1. 300,000 - 4,000 = 296,000

2. 296,000 ÷ 300,000 = 0.9866

3. 0.98 x 100 = 98.66%

Once the lender calculates the LTV ratio, this loan application is likely to be declined. The vast majority of mortgages require 3% to 5% down. The exception is if you qualify for a mortgage that has no down payment requirement, such as a VA loan or a USDA loan.

The bigger a down payment you can make, the lower the LTV ratio drops, and the more loans you could potentially qualify for. 

Here’s what would happen to the LTV if you make a $10,000 down payment. 

1. Value (300,000) minus down payment (10,000) = desired loan amount (290,000)

2. Loan amount (290,000) divided by value (300,000) = 0.9666

3. 0.96 x 100 = 96.66% LTV

A lower LTV is less risky for the lender because it shows them you have skin in the game. You’re investing your money just like you’re asking them to invest theirs. 

In this scenario, you could apply for a conventional mortgage that allows a maximum ratio of 97%.