What is LTV (Loan-to-Value Ratio)?
The Loan-to-Value (LTV) ratio is a financial metric used by lenders to express the ratio of a loan to the value of the asset purchased. In real estate, it measures how much of the home's value you are borrowing compared to how much you are putting down in cash.
How to Calculate LTV
The formula for calculating your Loan-to-Value ratio is extremely simple: The CFPB defines LTV and explains how lenders use it to determine mortgage eligibility and whether PMI is required.
For example, if you are buying a home for $400,000 and you put down $80,000 (which is 20%), you need to borrow $320,000.
$320,000 ÷ $400,000 = 0.80.
Multiply by 100, and your LTV is 80%.
Why Does LTV Matter?
Lenders use LTV to assess risk. The higher the LTV, the riskier the loan is for the bank, because you have less of your own "skin in the game."
- Below 80%: Considered the gold standard. You will likely get the lowest interest rates and you will not have to pay for mortgage insurance.
- 80% to 95%: You can still easily get a conventional loan, but the lender will require you to pay Private Mortgage Insurance (PMI) to protect them in case you default.
- Above 95%: You will generally need to look at government-backed loans, like an FHA loan, which allows LTVs as high as 96.5% (meaning a 3.5% down payment).
