Loan to Value (LTV) Ratio Calculator 2023
The loan-to-value calculator measures the relationship between the mortgage amount and the value of the home and is used by lenders to determine the risk associated with a secured loan.
What is a Loan-to-Value (LTV) Ratio?
The LTV ratio is an important financial indicator used by mortgage lenders as it shows the amount of initial equity the borrower has in the home. The ratio is a crucial component of the mortgage underwriting process and is used as a requirement for a majority of mortgage programs. The loan-to-value ratio is used for all home transactions such as buying a home, second mortgage, refinancing a mortgage, home equity loans, and even for a Home Equity Line of Credit (HELOC). The LTV ratio is used as a requirement for all types of mortgages, fixed and adjustable-rate mortgages (ARM). Adjustable-rate mortgages are mortgage rates that are linked to a benchmark index such as the Prime Rate which is linked to the FED Funds Rate.
How do I Calculate the Loan-to-Value Ratio?
The LTV ratio can be determined by having two inputs, the total mortgage amount and the value of the home. The mortgage amount is divided by the home value to determine the LTV ratio. The following formula is used:
For example, if the home selling price is $300,000 and the mortgage amount is $250,000 then the LTV ratio is 83% ($250,000/$300,000). The LTV ratio is impacted by three main factors, home selling price, down payment, and the appraised value of the home. In most cases, the appraised value of your home is not known till the mortgage process begins, hence, instead of the appraised value, the home selling price is used in the calculation.
What should my Loan-to-Value Ratio be?
A good LTV ratio to have is any value less than 80%. What this means is that the total mortgage loan taken from the lender is 80% of the home value. The other 20% comes in the form of a down payment and is your ownership stake in the home from the start of the mortgage. The reason for the 80% benchmark is because if the down payment is less than 20%, such that the LTV ratio is greater than 80%, then Private Mortgage Insurance (PMI) is required. Mortgage insurance can make the total mortgage more expensive and even result in higher monthly mortgage payments.
Should I have a High or a Low Loan-to-Value Ratio?
It is preferred to have a lower LTV ratio as it demonstrates that the borrower has a larger stake in the home which means the loan amount is a smaller proportion of the total value of the home. A higher LTV ratio suggests a larger mortgage amount and more risk for the lender. Lenders use the debt-to-income (DTI) ratio and the LTV ratio as risk-measuring tools during the underwriting process. If the mortgage amount is closer to the value of the home, that is a higher LTV ratio, it presents a larger risk for lenders if the borrower defaults on their mortgage payments as there is a smaller equity cushion. In the event of foreclosure, the lender will have to cover a larger portion of the cost as the home equity owned by the borrower is smaller. Therefore, a higher LTV ratio often results in a higher mortgage interest rate to compensate the lender for the additional risk. An LTV ratio below 80% is preferred and this can be achieved by making a larger down payment.
What is the relationship between the Loan-to-Value Ratio and Down Payment?
The loan-to-value ratio and down payment are two sides of the same coin, such that a higher down payment results in a lower LTV ratio, and a lower down payment results in a higher LTV ratio. A minimum down payment requirement for different mortgages is equivalent to having a maximum LTV ratio requirement. The sum of the LTV ratio and the percentage of a down payment is equal to the home value as seen in the table:
| Home Value | Mortgage Amount | Down Payment (%) | LTV Ratio |
|---|---|---|---|
| $300,000 | $285,000 | $15,000 (5%) | 95% |
| $270,000 | $30,000 (10%) | 90% | |
| $255,000 | $45,000 (15%) | 85% | |
| $240,000 | $60,000 (20%) | 80% | |
| $225,000 | $75,000 (25%) | 75% |
The table shows the various values of the mortgage amount, down payment, and LTV ratio for a home value of $300,000. As the down payment rises from 5% to 25%, the LTV ratio falls from 95% to 75%. In each case the sum of the down payment, that is the home equity of the borrower, and the mortgage loan taken is the value of the home.
How do Lenders View the Loan-to-Value Ratio?
The LTV ratio is an important requirement for different mortgage lenders. Here is a general summary:
| LTV Ratio | Down Payment | Private Mortgage Insurance (PMI) | Lender Perception |
|---|---|---|---|
| LTV > 97% | Down Payment < 3% | Yes | Poor LTV |
| 90% < LTV < 97% | 3% < Down Payment < 10% | Yes | Acceptable LTV |
| 80% < LTV < 90% | 10% < Down Payment < 20% | Yes | Average LTV |
| LTV < 80% | Down Payment > 20% | No | Good LTV |
If an LTV ratio is greater than 97%, such as when the downpayment is less than 3% of the home’s value, you will not be able to get a mortgage excluding special programs such as Conventional 97, VA Loan, and USDA Loan. LTV greater than 97% is a very poor LTV ratio and will result in the requirement of mortgage insurance and higher mortgage rates . An LTV ratio greater than 90% but less than 97% is acceptable and requires PMI. Apart from the above loan options, FHA Loan is also available as this program requires an LTV of 96.5%. An LTV greater than 80% but less than 90% is an average LTV ratio and accepted by most mortgage programs but still requires mortgage insurance. An LTV below 80% is good as mortgage insurance is not required. Larger mortgages such as Jumbo Loans usually require an LTV ratio of less than 80%.
What is the Loan-to-Value Ratio Requirement for different Home Financing Options?
The loan-to-value ratio is essential in determining if you are eligible for various home financing transactions:
- Buying a Home: An LTV ratio below 80% is good as mortgage insurance will not be required. However, an LTV ratio of up to 97% is also accepted by certain programs. If you are planning to buy a house with bad credit, then it is unlikely that you will be able to get a loan with an LTV ratio of 97%.
- Refinance: Similar to first time home purchase, an LTV ratio of less than 80% is good. However, greater than 80% is accepted with mortgage insurance (PMI) .
- Home Equity Line of Credit (HELOC): An LTV ratio below 80% is good. Most lenders will underwrite a HELOC with this ratio. An LTV greater than 80% is too high and more of the mortgage should be paid off before considering a HELOC.
- Second Mortgage & Home Equity Loan: An LTV ratio below 65% is good and will be accepted by lenders. An LTV greater than 85% is very high and more of the mortgage should be paid.
What is the Loan-to-Value Ratio Requirement for different Mortgage Programs?
LTV ratio is used as a requirement for various mortgage programs:
| Mortgage Program | Maximum LTV Ratio | Minimum Down Payment |
|---|---|---|
| Conventional Loan | 97% | 3% |
| Jumbo Loans | 80% | 20% |
| FHA Loan | 96.5% | 3.5% |
| VA Loan | 100% | 0% |
| USDA Loan | 100% | 0% |
Conventional mortgages can allow for an LTV ratio of up to 97% or a downpayment as low as 3%. On a $500,000 home, only $15,000 ($500,000*3%) is required as a down payment. Jumbo mortgages require an LTV ratio of 80% or lower, which is a down payment of at least 20%. These mortgages are larger than the conforming loan limits set by the Federal Housing Finance Association (FHFA) and require a lower LTV ratio because of the additional risk involved.
FHA loans are mortgages that are insured by the Federal Housing Administration and require the LTV ratio to be below 96.5% or at least a 3.5% down payment. The FHA loan program’s goal is to make housing affordable for low to moderate-income earners. The VA home loan is insured by the Department of Veterans Affairs and the USDA loan is backed by the Department of Agriculture and neither of them has an LTV ratio requirement. If you meet the other requirements of USDA loans and VA loans, these loans allow for as low as zero downpayment. Adding closing costs to your mortgage will increase your LTV ratio. This might be done if a borrower wants to finance their closing costs rather than pay them upfront, such as with a no-closing-cost mortgage.
Can I Lower my Loan-to-Value Ratio?
Yes, you can try to reduce your LTV ratio which can help get you a better mortgage rate for your home. Two strategies can be used to reduce the loan-to-value ratio:
- Save up for a larger Down Payment: One of the key determinants of the LTV ratio is the amount of money that you put upfront for the home. If your down payment is larger, then the mortgage amount will be a smaller percentage of the home value. Therefore, if you want to get a better mortgage rate with a lower LTV ratio, you can try to save for a larger down payment.
- Buy a Cheaper Home: If you can’t increase your down payment then the next best alternative is to try to find a home with a lower price tag. By buying a home with a lower price, the same down payment will result in a lower LTV ratio. For example, say you have saved $20,000 for a down payment. If the home price was $400,000, that results in an LTV ratio of 95% ($380,000/$400,000), whereas if the home price was $200,000 the LTV ratio would reduce to 90% ($180,000/$200,000).
Check how much house you can afford using our home affordability calculator.
It is in your best interest to try to reduce your LTV ratio as much as possible, before applying for a mortgage. If you can get the LTV ratio below 80% you can avoid private mortgage insurance (PMI).