How lenders calculate LTV (simple formula)
The LTV formula is straightforward and the same no matter the property type:
LTV = (Loan amount ÷ Lesser of appraised value or purchase price) × 100
Example: You want a $240,000 mortgage on a home that appraises at $300,000.
LTV = ($240,000 ÷ $300,000) × 100 = 80%
Lenders often use the lower of the sale price or the appraised value when computing LTV. That protects lenders from paying more for collateral than the market will support.
How property type changes LTV expectations
While the calculation is identical, lenders treat primary residences, second homes, and investment properties differently because each carries different risk profiles.
-
Primary residence: Lenders view owner-occupied homes as lower risk. Typical allowable LTVs are highest here — many conventional loans accept up to 95% LTV for qualified borrowers (but higher LTVs usually trigger mortgage insurance). Government programs (FHA VA USDA) have their own LTV and down‑payment rules. For example, FHA loans allow high LTVs with mortgage insurance; VA loans permit 100% financing for eligible veterans (see VA program rules) (CFPB).
-
Second home (vacation home): Lenders see higher default risk for non-primary homes since borrowers prioritize their primary residence payments. Typical maximum LTVs are lower than for primary homes; lenders commonly limit second-home LTV to around 75–90% depending on credit, documentation, and lender overlays.
-
Investment (rental) property: Highest lender risk and therefore the lowest typical LTV limits. Lenders often require larger down payments and set maximum LTVs in the 65–80% range for single-family rentals. For multi-unit investment properties or stretch financing scenarios, allowable LTVs fall further.
These ranges vary by lender, loan program, and market conditions. The Consumer Financial Protection Bureau provides guidance on mortgage terms and underwriting that underlies these differences (CFPB).
Key lender considerations that affect LTV limits
- Credit score and debt-to-income (DTI): Higher credit and lower DTI can increase a borrower’s allowable LTV.
- Loan purpose: Purchase loans, rate-and-term refinances, and cash-out refinances have different LTV caps. Cash‑out refinances generally allow lower maximum LTVs.
- Loan program: Conventional (Fannie Mae/Freddie Mac), FHA, VA, and portfolio lenders set their own LTV rules. For example, conforming loan guidelines from the agencies and FHA program rules influence typical maximums (FHFA; HUD).
- Property condition and appraisal type: A full appraisal versus a desktop or drive‑by appraisal can affect the value used in the LTV calculation.
Real-world examples by property type
Primary residence example:
- Purchase price/appraised value: $400,000
- Loan requested: $320,000
- LTV: $320,000 ÷ $400,000 = 80%
At 80% LTV a borrower will likely avoid private mortgage insurance (PMI) on a conventional loan. If the loan were 90% LTV, PMI would typically apply until the LTV is reduced to acceptable thresholds.
Second home example:
- Appraised value: $500,000
- Loan requested: $425,000
- LTV: 85%
A lender may accept 85% for a second home but charge a higher rate or require stronger documentation. Some lenders have a hard cap (e.g., 80% or 75%) for second homes depending on market and borrower risk.
Investment property example:
- Appraised value: $600,000
- Loan requested: $480,000
- LTV: 80%
Many lenders treat 80% LTV on an investment property as aggressive and may require higher reserves, stronger credit, or a higher rate. If the investor uses a portfolio lender, terms and LTV allowances can differ significantly.
How appraisal, purchase price, and loan amount interact with LTV
- Appraised value vs. purchase price: Lenders use the lower of the two for LTV. If you pay above appraisal, your effective LTV increases unless you add a larger down payment.
- Down payment: Increasing the down payment directly lowers LTV — the simplest way to improve your ratio.
- Renovation or value-add loans: Some programs lend based on projected after-repair value (ARV). In ARV deals, the loan amount divided by ARV gives the post-repair LTV and can support higher lending if backed by solid contractor estimates and lender oversight.
Mortgage insurance and LTV — what to expect
Mortgage insurance exists because high LTVs expose lenders to more loss in default. Typical points:
-
Conventional loans: PMI is usually required above 80% LTV. PMI can be canceled when you reach 78% automatic triggers differ by servicer and program; you can request removal earlier at 80% based on documentation or appraisal (see our guide: Strategies to Remove Private Mortgage Insurance (PMI) Early).
-
FHA loans: Require upfront and annual mortgage insurance regardless of LTV for many loan terms, though rules vary by case (HUD/FHA guidance).
-
VA loans: Generally don’t require mortgage insurance but may have a funding fee depending on entitlement and down payment.
For further detail on mortgage insurance mechanics and options for borrowers with low down payments, see How Mortgage Insurance Works for Low-Down-Payment Loans.
Ways to lower or improve your LTV
- Increase your down payment: The most direct method.
- Make an initial larger payment at closing: If you pay down principal immediately (short-term), lenders will recalculate LTV if applicable on refinances.
- Improve the property value before close: Upgrades that increase appraised value can lower LTV, but lenders often scrutinize “value add” claims.
- Use seller concessions cautiously: These don’t reduce loan amount and therefore won’t lower LTV.
- Refinance when equity grows: As you pay principal and as values rise, refinancing to a lower LTV or a better rate becomes possible (see Mortgage Refinancing for planning tips).
In my practice I routinely advise clients to budget for at least a 20% down payment on investment purchases to preserve cash flow and avoid higher borrower costs associated with high-LTV investment loans.
After-purchase LTV: how it changes and why it matters
LTV is a moving target after closing:
- Principal payments reduce loan balance and therefore lower LTV over time.
- Rising home prices lower LTV because the denominator grows.
- Declining markets increase LTV and can trigger loan-to-value protections, refinancing limits, or loss‑mitigation consequences for distressed borrowers.
If your goal is to remove PMI or qualify for better refinancing, track both your outstanding loan balance and current market value. You may need a new appraisal or automated valuation for lender approval to change mortgage insurance status.
Common borrower mistakes to avoid
- Assuming the purchase price will be used instead of a lower appraisal. Always plan for the lender to use the lower of the two.
- Overleveraging investment properties with thin equity; rental underwriting often requires higher reserves.
- Ignoring program-specific rules (FHA, VA, conventional) that change mortgage insurance or allowable LTV.
Practical checklist before applying
- Check your credit score and DTI — stronger credit increases LTV flexibility.
- Get a preliminary estimate of the appraised value from comparable sales.
- Decide if you’ll buy down LTV with a larger down payment.
- Ask lenders about their specific LTV limits by property type and program.
Internal resources and further reading
- For how property classification affects loan terms, see our related article: How Property Type Affects Mortgage Eligibility.
- To understand mortgage insurance and options for low down payments, read: How Mortgage Insurance Works for Low-Down-Payment Loans.
- For strategies to cancel mortgage insurance sooner, see: Strategies to Remove Private Mortgage Insurance (PMI) Early.
Authoritative sources
- Consumer Financial Protection Bureau — mortgage basics and underwriting considerations (CFPB).
- Federal Housing Finance Agency — guidance on conforming loan limits and market risk (FHFA).
- U.S. Department of Housing and Urban Development / FHA — program rules for government-backed loans (HUD/FHA).
Professional disclaimer
This article is educational and does not constitute personalized financial, legal, or tax advice. Rules, loan programs, and underwriting guidelines change; consult your lender or a qualified advisor to evaluate your specific situation.
Final takeaway
The math behind LTV is simple, but the consequences depend heavily on property type, loan program, and market conditions. For primary homes you’ll usually see the most generous LTV allowances; second homes and investment properties typically require lower LTVs (larger down payments) and more borrower documentation. In practice, aiming for 80% LTV or lower where possible gives you the most options: lower rates, fewer insurance costs, and better refinancing flexibility.