What Is Loan-to-Value Ratio? Understanding LTV and Why It Matters

When applying for a mortgage, one of the most important financial metrics your lender will evaluate is your loan-to-value ratio, or LTV. This key figure plays a significant role in determining your loan eligibility, interest rate, down payment requirements, and whether you’ll need private mortgage insurance (PMI).

Understanding the LTV ratio can give you a strategic advantage in the home buying or refinancing process. In this in-depth guide, we’ll explain what LTV is, how it’s calculated, why it’s important, and what you can do to manage it wisely to achieve long-term financial health and homeownership goals.

What Is Loan-to-Value (LTV) Ratio?

Your LTV ratio compares the size of your mortgage loan to the appraised value of the home. It’s expressed as a percentage and reflects how much of the property’s value you’re financing. Lenders use this ratio to assess the risk of lending to you.

To calculate it, divide the loan amount by the appraised home value, then multiply by 100. For example, if you purchase a home valued at $500,000 and take out a mortgage for $400,000, your LTV would be 80%. The remaining 20% would be your home equity, typically provided through your down payment.

LTV = (Loan Amount ÷ Appraised Property Value) × 100

While this calculation may seem simple, its impact on your mortgage experience is anything but. LTV affects the cost of your loan, the types of loans available to you, and how soon you can access benefits like removing PMI or refinancing.

Why LTV Is So Important to Lenders

Lenders use the LTV ratio as a core metric to evaluate risk. The higher the LTV, the less equity the borrower has in the property. That means if the borrower defaults, the lender is more likely to lose money in the foreclosure process.

For instance, with an LTV of 95%, the borrower has contributed only 5% equity, while the lender has provided the rest. This can raise concerns about the borrower’s financial strength and commitment to the property. On the flip side, an LTV of 70% indicates a healthy buffer, making the loan far less risky.

This risk evaluation directly influences the loan terms you receive. Borrowers with lower LTVs often qualify for better interest rates, higher loan limits, and more flexible underwriting standards. A lower LTV can also save you money by eliminating the need for PMI, which is typically required when your LTV exceeds 80%.

LTV Limits by Loan Type

Different loan types have different maximum allowable LTV ratios:

• Conventional Loans: Usually allow up to 97% LTV. If your LTV is above 80%, PMI is required.
• FHA Loans: Allow up to 96.5% LTV for purchases. These loans require mortgage insurance premiums (MIP), regardless of LTV.
• VA Loans: Backed by the Department of Veterans Affairs, these allow 100% LTV for eligible borrowers without requiring PMI.
• USDA Loans: Designed for rural and suburban homebuyers, USDA loans also offer 100% LTV without traditional PMI.
• Jumbo Loans: These loans exceed conforming loan limits and often require a lower LTV—typically 80% or less—along with strong credit and income documentation.

Lenders also apply different standards to refinance transactions. For example, cash-out refinances generally require an LTV of 80% or less. However, streamline refinance programs backed by the government may allow for higher LTVs, particularly if you're not seeking to take equity out of your home.

How LTV Affects Private Mortgage Insurance (PMI)

PMI is a safeguard for lenders, not borrowers. It protects the lender if you default on your loan. While PMI makes homeownership possible with a smaller down payment, it also increases your monthly expenses.

Most conventional loans require PMI when your LTV exceeds 80%. You can request PMI cancellation once your LTV reaches 80% based on the original loan amount or automatically have it canceled at 78%. Keep in mind, home appreciation or prepayments may help you reach that threshold faster.

For FHA loans, mortgage insurance is required regardless of LTV and usually remains in place for the life of the loan unless you refinance into a conventional loan.

VA and USDA loans, however, do not require PMI or monthly mortgage insurance. VA loans do include a one-time funding fee, while USDA loans require a guarantee fee.

Reducing Your LTV Ratio: Why and How

Lowering your LTV can significantly improve your loan terms and reduce costs. Here’s how to reduce it:

1. Increase your down payment. This is the most direct way to improve your LTV. A larger down payment reduces your loan amount relative to the home’s value.
2. Choose a lower-priced home. If you're stretching your budget, selecting a more affordable property can help keep your LTV in check.
3. Wait and save. Delaying your purchase until you have more savings can allow you to make a bigger down payment.
4. Improve your credit score. A stronger credit profile can give you more loan options and may allow higher LTVs at better rates.
5. Refinance when your home value increases. If your property appreciates, your LTV will drop—opening doors for a refinance or PMI removal.

Let’s look at an example. Imagine you’re eyeing a $350,000 home and have $35,000 saved. That’s a 10% down payment, resulting in an LTV of 90%. To avoid PMI and get better rates, you’d need at least $70,000 down to bring your LTV to 80%.

However, with CapCenter’s Zero Closing Costs, you may be able to allocate more toward your down payment rather than spending thousands on lender fees—giving you a better LTV position upfront.

LTV in Refinance Scenarios

If you're refinancing your home, your current LTV still matters. A lower LTV typically means a smoother refinance process and better terms. For cash-out refinancing, lenders often cap LTVs at 80% to maintain equity in the home.

Some government-backed refinance programs (such as FHA Streamline or VA IRRRL) are designed to help homeowners refinance even if their LTV is high, as long as they’re current on their mortgage and meet other criteria.

Understanding Combined Loan-to-Value (CLTV)

CLTV, or Combined Loan-to-Value, goes a step further by adding in any additional mortgages on the property, such as home equity loans or HELOCs.

For instance, if your first mortgage is $250,000 and you take a $50,000 HELOC on a home valued at $400,000, your CLTV would be 75%.

While LTV considers only the primary loan, CLTV gives lenders a fuller picture of your total mortgage obligations. Some lenders set maximum CLTV limits for second mortgages or equity products, especially if you plan to tap into your home equity soon after purchase.

CapCenter Helps You Build Equity From Day One

At CapCenter, we believe in empowering homebuyers with the tools and strategies to maximize long-term wealth. That’s why we focus on helping you structure your loan with a strong LTV position, ensuring you’re not overextending and setting you up for success.

Our unique model with Zero Closing Costs gives you an edge—allowing more of your funds to go toward your down payment or be saved for future equity-building strategies. Whether you’re purchasing your first home or refinancing a current property, we’ll help you choose the loan structure that makes sense for your goals.

In a competitive housing market, being strategic about LTV isn’t just smart—it’s essential.

FAQs: Deep Dive into Common LTV Questions

What’s the ideal LTV for homebuyers?
While an 80% LTV is the industry benchmark to avoid PMI, putting down more can lead to lower monthly payments and better interest rates. That said, some buyers use high-LTV loans as a strategic way to enter the market sooner.

How does home appraisal impact LTV?
A higher-than-expected appraisal can help lower your LTV. However, if the home appraises below the purchase price, your LTV could rise—and you might need to increase your down payment to keep your loan approval on track.

Can you negotiate LTV terms with your lender?
Not exactly. LTV is a function of the home price, loan amount, and appraised value. However, you can influence LTV by adjusting your loan amount or negotiating seller concessions that allow you to put more money down.

Can appreciation alone reduce my LTV?
Yes. If your home increases in value, your LTV drops. This can help you remove PMI or qualify for a refinance even without making extra payments.

What’s a good LTV when refinancing?
Most lenders want 80% or lower for a cash-out refinance. But for rate-and-term refinancing, you may be eligible with higher LTVs depending on your loan type and credit profile.