How LTV is calculated and what the percentage means

The LTV formula is simple:

LTV = (Loan amount / Property value) × 100

Example: Purchase price = $300,000, down payment = $60,000 → loan = $240,000 → LTV = $240,000 ÷ $300,000 = 0.80 → 80% LTV.

That percentage is a shorthand for risk. A lower LTV means more borrower equity and generally lower risk for the lender. Lenders price loans and set rules based on that risk assessment: interest rates, fees, requirement for private mortgage insurance (PMI), and maximum loan amounts are all influenced by LTV.

Authoritative context: the Consumer Financial Protection Bureau (CFPB) and federal loan programs recognize LTV as a primary underwriting factor (CFPB, consumerfinance.gov).

Why LTV matters across different loan types

  • Conventional loans (sold to Fannie Mae/Freddie Mac): Lenders commonly require an 80% LTV or lower to avoid borrower-paid PMI; above 80%, most lenders add PMI or higher pricing. (See CFPB resources on mortgage insurance.)
  • FHA loans: FHA allows higher LTVs (down payments as low as 3.5% on purchase loans) but uses a different mortgage-insurance structure (annual MIP and upfront MIP governed by HUD/FHA rules).
  • VA and USDA loans: These government-guaranteed programs can allow 100% financing for eligible borrowers — meaning 100% LTV is possible without a down payment. The loan program’s guarantee changes how lenders treat the risk.

In my practice advising homebuyers, understanding the product-specific LTV limits early in the shopping process prevents surprises at underwriting.

Combined LTV, CLTV, and HCLTV — why second liens matter

Lenders don’t only look at the first mortgage. When a borrower has or takes a second loan (HELOC, second mortgage), underwriters use measures that combine balances:

  • CLTV (Combined Loan-to-Value): (First mortgage + second mortgage) ÷ property value.
  • HCLTV (Home-Combined LTV) or TLTV: Includes the maximum available balance on a second-lien product like a HELOC.

If your first mortgage is 75% LTV but an outstanding second brings CLTV to 95%, many conventional lenders will treat the loan as higher risk and change pricing or require mortgage insurance.

How LTV affects pricing, insurance, and approval

  1. Interest rate and pricing: Higher LTV typically means higher interest rates or fewer favorable pricing tiers because the lender expects a greater chance of loss in default.
  2. Mortgage insurance: For conventional loans, PMI is usually required when LTV > 80%. For FHA loans, borrowers pay mortgage insurance premiums based on program rules (HUD/FHA guidance).
  3. Loan program eligibility: Some programs (jumbo loans, investment-property mortgages) have stricter LTV limits. Jumbo loans often require lower LTVs and stronger credit profiles compared with conforming loans.
  4. Refinance and cash-out limits: Conforming cash-out refinances commonly cap LTV at 80%; FHA cash-out refinance limits also generally follow an 80% cap for most borrowers.

Sources: CFPB, HUD/FHA program pages, and standard industry underwriting practice.

Real-world examples (illustrative)

  • Purchase example: Buyer A puts 20% down on a $400,000 home. Loan = $320,000 → LTV = 80%. That 80% threshold typically avoids borrower-paid PMI and unlocks better pricing.
  • High-LTV example: Buyer B puts 5% down on the same home. Loan = $380,000 → LTV = 95%. Expect higher rates, mandatory mortgage insurance (or program-specific guarantees), and additional underwriting scrutiny.
  • Refinance example: Homeowner C wants a cash-out refi and holds $50,000 equity in a $500,000 home ($450,000 loan currently). If they request a new loan of $400,000, the new LTV is 80% (400k ÷ 500k). Many lenders will treat that as the upper practical limit for a conforming cash-out refinance.

How appraisals and value changes affect LTV

Lenders use the appraised value (or purchase price, if lower) to calculate LTV. That means:

  • If the market value increases, your effective LTV falls without you paying down principal.
  • If an appraisal comes in lower than expected, your LTV rises; that can change loan terms or require a larger down payment.

If you’ve made improvements before a refinance or sale, document work and consider a targeted appraisal review — improvements that increase appraised value can materially reduce LTV. See our guide on loan-to-value adjustments after home improvements for practical steps and appraisal tips: “Loan-to-Value Adjustments After Home Improvements: How Appraisals Change LTV” (internal resource).

Practical steps to improve your LTV and loan terms

  • Increase your down payment: The clearest way to lower initial LTV.
  • Pay down principal: Even modest principal reductions reduce LTV and can remove PMI sooner.
  • Make value-adding improvements: Kitchen, bath and curb improvements often yield a positive appraisal impact. (Link: our article on how improvements change LTV.)
  • Consider a piggyback loan or lender-paid mortgage insurance (LPMI): These alternatives can reduce or avoid borrower-paid PMI, though they have trade-offs — compare long-term costs.
  • Shop lenders: Different lenders underwrite and price LTV risk differently. Small rate or fee savings add up.
  • Use program features: VA and USDA loans have special rules for down-payment-free financing. FHA’s rules on MIP differ from conventional PMI — know program specifics.

Common mistakes and misconceptions

  • Mistake: Thinking LTV is fixed forever. It changes as market value and principal balance change.
  • Mistake: Ignoring combined LTV. A small second lien can push you over conventional limits.
  • Misconception: High LTV means automatic denial. Many programs accept high LTVs but with higher cost or tighter underwriting criteria.

In my work, borrowers sometimes assume an appraisal will always come in at market estimate. Appraisals are snapshots; plan contingency funds to cover a gap between contract price and appraisal.

When LTV is most important (and when it’s not)

  • Critical: Mortgage underwriting, refinance cash-out decisions, removal of PMI, and purchasing investment properties.
  • Less critical: Small consumer loans or auto loans typically focus more on credit score and income; LTV still plays a role for auto-secured financing but behaves differently in practice.

Alternatives and special cases

  • Streamline refinances: Certain government streamline programs (FHA streamline, VA IRRRL) sometimes waive full appraisals or income documentation, reducing the immediate LTV impact — details vary by program and lender (see our overview: “Streamline Refinance: When It Saves Time and Money”).
  • Lender-paid mortgage insurance (LPMI) shifts the mortgage-insurance cost into a higher interest rate instead of a monthly PMI charge. LPMI can be cost-effective for certain borrowers but isn’t removable like borrower-paid PMI.

Internal resources for related reading:

Quick FAQ (short answers)

  • What’s a “good” LTV? For conventional financing, under 80% is commonly considered strong because it avoids PMI. Program-specific limits vary.
  • Can I get a loan with 95% or 97% LTV? Yes — FHA and some conventional programs (e.g., certain first-time buyer products) allow very high LTVs, usually with mortgage insurance.
  • How do I remove PMI? For conventional loans, PMI can be automatically canceled when the balance reaches 78% of original value or requested when you reach 80% (Homeowners Protection Act and lender procedures; see CFPB guidance). For FHA loans, MIP rules are different — consult HUD/FHA guidance.

Final notes and professional perspective

In my 15+ years advising homebuyers and homeowners, the most practical wins come from planning LTV early: decide your target LTV, pick the loan product that fits, and document value improvements before an appraisal. Even small additional down payments or modest renovations can unlock materially better loan pricing.

This page is educational and not individualized financial advice. For personalized planning, consult a licensed mortgage professional or financial advisor and review program-specific guidance from authoritative sources such as the CFPB (consumerfinance.gov) and HUD/FHA (hud.gov).

Sources and further reading: Consumer Financial Protection Bureau, HUD/FHA program pages, Fannie Mae/Freddie Mac underwriting guidelines and common industry practice (2025).