What is LTV?
Loan-to-Value Ratio Explained
by Shawn Carvin, Senior Mortgage Banker
Commonly referred to as LTV ratio in the mortgage industry, loan-to-value ratio is the loan amount divided by the purchase price (or current market value) of the home:
Loan amount / purchase price = LTV
For example: 475,000 (loan amount) ÷ 550,000 (purchase price) = 86.36% LTV
Why is LTV important?
LTV is utilized by lenders when evaluating a mortgage application for either purchasing or refinancing a home.
For a purchase, loan-to-value is calculated based on the purchase price, as long as it does not exceed the appraised value. If the appraised value of the home is less than the purchase price, the lower figure is used. For refinancing purposes, loan-to-value ratio is always calculated with the home’s current appraised value.
LTV is one of the keys in getting approval for a mortgage. Generally, lenders prefer loans with lower loan-to-value ratios because default rates tend to be higher on mortgages when the borrowers have little or no equity in the home. On a mortgage with a lower loan-to-value ratio, the lender will also typically recover a greater amount of the outstanding loan balance in the event the home is sold at a foreclosure auction.
LTV requirements of popular mortgage programs
Some loan programs are more accepting higher LTVs. But in general, these borrowers pay higher interest rates than borrowers with larger down payments and lower loan-to-value ratios.
These loans are backed by the U.S. Department of Veterans Affairs (VA) and allow for up to 100% loan-to-value ratio. As such, no down payment is required. VA mortgages are available only to active-duty military, veterans, and their surviving spouses.
Insured by the United States Department of Agriculture, like VA loans, USDA loans also allow up to 100% LTV with no down payment required. USDA mortgages are generally available only to borrowers purchasing properties in rural areas.
Insured by the Federal Housing Administration, FHA mortgages support a maximum effective loan-to-value ratio of 96.5%, as borrowers are required to make a down payment of at least 3.5%. FHA loans also have relatively liberal qualification requirements, making this loan program attractive to a wide variety of borrowers.
Guaranteed by Fannie Mae or Freddie Mac, conventional conforming loans permit a LTV up to 97%. Private Mortgage Insurance, combined with a down payment of as little as 3%, can qualify a borrower for a conventional mortgage. Conventional loans are available through most mortgage lenders for borrowers with good to excellent credit scores.