What is Loan-to-Value (LTV) Ratio in Real Estate? (2024)

Lenders look at several factors to determine if you qualify for a mortgage. The loan-to-value ratio is a key metric that can impact your ability to get a home equity line of credit (HELOC) or home equity loan or to refinance. It also demonstrates how close you are to fully paying off your home. This guide will explore how the LTV ratio works, why it’s important, and ways to improve your number.

Understanding the Loan-to-Value Ratio

The loan-to-value ratio measures the percentage of a loan’s balance against a property’s value. For instance, if you have a $700,000 mortgage balance for a $1 million property, you have a 70% LTV ratio.

Mortgage lenders use this ratio to assess your likelihood of paying back the mortgage if they give you additional financing. Many loan providers limit your LTV ratio to 80% across your mortgages.

In the previous example with a 70% LTV on a $1 million house, the homeowner can only borrow an additional $100,000 against the home through a home equity loan or a line of credit. The extra $100,000 results in $800,000 in total debt against the $1 million home. Some lenders have higher maximum LTV ratios that allow homeowners to borrow more money.

How to Calculate Your Loan-to-Value Ratio

The loan-to-value ratio calculation is straightforward. You divide the total balance of your mortgages toward a single property by the value of that property. As discussed earlier, a $700,000 mortgage on a $1 million property comes to a 70% LTV ratio.

If a homeowner has a $400,000 mortgage and a $200,000 HELOC on a $1 million property, that property has a 60% LTV ratio. Here’s the math for this example:

LTV ratio = Total balance of loan(s) / Property’s value

LTV ratio = $400k + $200k = $1 million

LTV ratio = $600k / $1 million

LTV ratio = 60%

Loan-to-Value Ratio Rules By Loan Type

Lenders use this ratio to determine if you qualify for a refinance or a secondary mortgage. However, they also set maximum LTV ratios for people who are aspiring to buy their first homes. LTV rules also differ based on the type of mortgage you are seeking.

FHA Loans

FHA loans have generous LTV requirements. If your credit score is 580 or higher, you can buy a house with an LTV ratio as high as 96.5%. That means you only have to make a 3.5% down payment. Consumers with credit scores between 500-580 cannot exceed a 90% LTV ratio. While most types of loans aren’t available for people with 500 credit scores, it’s nice to know that a 10% down payment is all it takes for an FHA loan.

VA and USDA Loans

VA and USDA loans both have no LTV ratio requirements. You can get a house without putting any money down and end up with a 100% LTV ratio in the process. VA loans are exclusively available for qualifying active and former veterans along with their spouses. USDA loans cater to home buyers who want to purchase property in qualifying rural and suburban areas.

Fannie Mae and Freddie Mac

You can get a Fannie Mae or Freddie Mac loan with a 97% LTV ratio. That means you only have to put 3% down if you have good credit. However, there is a downside to having a high LTV ratio. Mortgage lenders will require that you also pay private mortgage insurance if your LTV is higher than 80%. Making a higher down payment will get you there faster. You can also make additional payments toward your mortgage’s principal to reach the 80% LTV threshold sooner.

What Is a Good LTV?

The best LTV ratio is 0% which indicates you have fully paid off your mortgage. An LTV ratio below 80% will help you qualify for a home equity loan or a line of credit if you need extra capital. Getting below an 80% LTV will give you more room for borrowing money. An LTV ratio above 80% can make it more difficult to receive a second mortgage and keep you in debt longer.

How to Lower Your LTV

You only have a few ways to lower your LTV ratio. It’s best to focus on what you can control, such as your down payment and monthly mortgage payments. Paying off your balance will reduce your LTV ratio. Making extra payments toward the mortgage principal each month can accelerate the process. Avoiding a second mortgage on your current property will also help.

Your LTV ratio is also likely to improve thanks to property appreciation. You gain equity as your property gains value. Properties often gain value in correlation to inflation, and some areas experience booming real estate markets. While you can’t control how much your property appreciates unless you tap into sweat equity, it’s a nice bonus that will lower your LTV ratio.

LTV vs. Combined LTV (CLTV)

The LTV ratio is used for your primary mortgage. However, you might need a home equity loan or a HELOC to cover additional expenses in the future. Combined LTV (CLTV) considers all of your loans that use the property as collateral. Combined LTV is always higher than LTV since the former will include additional loans that tap into the home’s equity. It’s possible for these values to be the same if you only have a primary mortgage and no secondary mortgage.

Getting Your LTV Ratio at a Good Level

An LTV ratio below 80% will help you avoid private mortgage insurance on a conventional loan and will make it easier to borrow money against your home’s equity. Getting your LTV ratio closer to zero will allow you to get out of debt sooner. More frequent mortgage payments and property appreciation both play key roles. You may not need to borrow money against your property, but lowering your LTV ratio in the meantime can help you receive better rates and terms if you need extra capital.

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