Quick answer

Lenders treat LTV as a direct measure of borrower risk. A lower LTV reduces lender exposure and typically improves approval odds, lowers interest-rate pricing, and may eliminate private mortgage insurance (PMI) for conventional loans (Consumer Financial Protection Bureau).

How lenders use LTV in underwriting

  • Risk threshold: Many conventional lenders prefer LTVs of 80% or lower to avoid PMI and qualify for the best pricing. Higher LTVs increase scrutiny, require compensating factors, or trigger additional conditions. (CFPB)
  • Pricing and overlays: Lenders add price adjustments or require reserves for higher LTV loans — these are lender-specific and vary by product.
  • Loan type differences: Government programs (FHA, VA, USDA) have different LTV rules and insurance structures. Check program rules and insurer requirements before assuming identical treatment.

How to calculate LTV (simple example)

LTV = (Loan amount ÷ Appraised value) × 100
Example: $160,000 loan ÷ $200,000 appraised value = 0.80 → 80% LTV.

Practical impact on approval odds and monthly cost

  • LTV ≤ 80%: Best pricing, typically no PMI on conventional loans, simplest underwriting path.
  • LTV 80–90%: Approvals possible but often with PMI and higher rates.
  • LTV > 90%: Fewer conventional options, stricter credit and income requirements, higher pricing.

In my experience working with borrowers, moving from a 95% to a 75% LTV often produces the largest single improvement in both approval certainty and monthly payment — mainly because it removes PMI and unlocks lower rate tiers.

What affects your LTV besides the down payment

  • Appraisal value vs. sales price: An appraisal that comes in low raises your effective LTV.
  • Property condition and permitted improvements: Unpermitted or deferred work can reduce appraised value.
  • Automated valuations: Some lenders use AVMs that can change LTV calculations or trigger full appraisals; see our guide on automated valuations.

Strategies to improve your LTV and approval odds

  • Increase your down payment to lower LTV before applying.
  • Pay down existing liens to reduce the new loan amount.
  • Challenge or update a low appraisal with comparable sales or documented repairs.
  • Use down payment assistance or gift funds where allowed by the lender and loan program.
  • Consider waiting to refinance after making equity-building improvements.

How LTV interacts with mortgage insurance and escrow requirements

  • PMI: Conventional loans typically require PMI above 80% LTV; PMI raises monthly cost until the loan reaches the lender’s cancellation threshold (CFPB).
  • Government mortgage insurance: FHA, VA, and USDA have different fees and rules; read program guides carefully.
  • Impounds/escrows: Lenders may require escrow accounts for taxes and insurance at higher LTVs or for specific loan types—learn when lenders require impounds in our article on mortgage impounds.

Common mistakes to avoid

  • Assuming all lenders treat the same LTV the same way — lender overlays and investor guidelines vary.
  • Ignoring appraisal risk — a low appraisal can unexpectedly raise your LTV and change terms.
  • Forgetting other underwriting factors — credit score, debt-to-income, and reserves often matter as much as LTV.

Quick checklist before you apply

  • Run an LTV calculation using a conservative estimate of value.
  • Order or review recent comps and be ready to support the appraisal.
  • Decide whether removing PMI or lowering your rate is worth increasing your down payment or delaying purchase.
  • Talk to multiple lenders to compare rate/PMI tradeoffs and overlays.

Related FinHelp guides

Sources & further reading

  • Consumer Financial Protection Bureau — Private Mortgage Insurance: consumerfinance.gov (CFPB).
  • U.S. Department of Housing and Urban Development — program pages for FHA (for program-specific MIP rules).

Professional disclaimer: This article is educational and does not replace personalized financial, legal, or tax advice. For tailored recommendations, consult a qualified mortgage advisor or housing counselor.