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Loan-to-Value (LTV) is the ratio of the loan amount to the property’s appraised value or purchase price, whichever is lower. It represents the percentage of the property value that is financed through debt, with the remainder representing the borrower’s equity stake. LTV is a critical risk metric because it indicates the lender’s exposure relative to the property’s value. Higher LTV ratios mean borrowers have less equity in the property, which increases the lender’s risk if the borrower defaults and the property must be foreclosed and sold. Lower LTV ratios provide a larger equity cushion that protects the lender and reduces default risk.

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Calculation

LTV = (Loan Amount) / (Property Value) × 100
The property value used in LTV calculations is always the lower of the purchase price or appraised value. This conservative approach ensures that LTV calculations reflect the most realistic property valuation. For refinance transactions, the appraised value is typically used, while purchase transactions use whichever is lower between the contract price and the appraised value. Example:
  • Purchase price: $500,000
  • Appraised value: $510,000
  • Down payment: $100,000
  • Loan amount: $400,000
  • LTV: 80% (using the lower of $500,000 purchase price or $510,000 appraised value)

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LTV impact on loan terms

LTV significantly influences multiple aspects of loan pricing and eligibility. Loans with LTV ratios above 80% typically require private mortgage insurance (PMI) for conventional loans, which adds to the borrower’s monthly payment until the LTV drops below 80% through principal paydown or property appreciation. Higher LTV ratios also generally result in higher interest rates because they represent increased risk to the lender. Many loan programs establish maximum LTV limits that vary by loan type, property usage, and borrower characteristics. These limits protect both lenders and investors by ensuring borrowers maintain meaningful equity stakes. LTV is also a primary factor in Loan-Level Price Adjustments (LLPAs), with higher LTV ratios triggering pricing adjustments that increase the loan’s cost.

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Common LTV thresholds and their significance

The 80% LTV threshold is particularly significant for conventional loans because it represents the traditional point at which PMI is no longer required. This threshold has become a common target for borrowers seeking to minimize monthly payments. FHA loans commonly allow LTV ratios up to 90% or even 96.5% with mortgage insurance, making them accessible to borrowers with smaller down payments. Some conventional programs permit LTV ratios up to 95% or even 97% for first-time homebuyer programs, though these higher ratios typically require mortgage insurance and may have stricter credit and income requirements.