What is Loan-to-Value (LTV) and Why Is It Important?
Loan-to-Value (LTV) is a simple ratio with outsized consequences for homebuyers and investors. It compares the loan balance to the property’s value and drives decisions about mortgage rates, required mortgage insurance, and which loan products you can access. In practice, lenders use LTV alongside credit score, debt-to-income ratio, and the property type to price risk and set terms.
In my 15 years advising buyers and investors, I’ve seen LTV determine whether a borrower gets a conventional 30-year fixed at a competitive rate, is forced to pay private mortgage insurance (PMI), or needs a larger down payment to qualify. Small changes in LTV—moving from 95% to 80%—can save thousands over the life of the loan.
How LTV is calculated (practical examples)
The core formula is:
LTV = (Loan Amount ÷ Property Value) × 100
- Purchase example: If you buy a house priced at $350,000 and make a $35,000 down payment, your loan is $315,000. LTV = (315,000 ÷ 350,000) × 100 = 90%.
- Refinance example: If your home appraises at $400,000 and you want a new loan for $240,000, LTV = (240,000 ÷ 400,000) × 100 = 60%.
Note: Lenders usually use the appraisal value for underwriting. For purchases they may use the lower of appraised value or contract price.
Related terms you’ll see in underwriting:
- CLTV (Combined Loan-to-Value): Includes all loans secured by the property (first mortgage + second mortgage/HELOC) divided by value.
- TLTV/HCLTV: Variations lenders use to evaluate maximum combined exposure when second liens have credit lines.
Why LTV matters to borrowers and investors
- Mortgage pricing
- Higher LTV = higher perceived lender risk = higher interest rates. Moving from 80% LTV to 95% LTV commonly raises the rate or increases lender fees.
- Mortgage insurance
- Conventional loans: PMI is normally required if LTV > 80%. PMI protects the lender; it can usually be removed once LTV reaches 78% (automatic termination per the Homeowners Protection Act) or by borrower request at 80% (when cultural and underwriting conditions are met). (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/)
- FHA loans: require an upfront mortgage insurance premium (UFMIP) and an annual MIP for most loans regardless of LTV, though rules vary by loan term and origination date (U.S. Dept. of Housing and Urban Development: https://www.hud.gov/)
- VA loans: generally allow up to 100% LTV for eligible veterans and typically do not require mortgage insurance—though a VA funding fee and eligibility rules apply (U.S. Dept. of Veterans Affairs: https://www.benefits.va.gov/homeloans/).
- Program eligibility and limits
- Many programs set maximum LTVs. For example, investment property loans often cap LTVs lower (commonly 70%–80%) because lenders view rentals as higher risk. See our guide on investment property mortgages for more specifics: Investment Property Mortgages: What Real Estate Investors Must Consider (https://finhelp.io/glossary/investment-property-mortgages-what-real-estate-investors-must-consider/).
- Down payment and equity strategies
- The bigger your down payment, the lower your LTV. Lower LTVs improve interest rates and can eliminate mortgage insurance, reducing monthly payments long term.
Common LTV thresholds and what they mean
- 80% LTV: Classic threshold for avoiding PMI on conventional loans and improving rate tiers.
- 78% LTV: Automatic PMI termination for many conventional loans under the Homeowners Protection Act; check loan specifics and servicer processes. (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/)
- >95% LTV: Common for government-backed programs (FHA/VA) or special first-time buyer programs but typically carries higher insurance or fees.
- 100%+ LTV: Rare for purchase loans except for certain VA or USDA loans that permit little or no down payment.
How lenders treat appraisals, value changes and new loans
- Appraised value vs. purchase price: Lenders base LTV on the lower of the sales price and the appraised value for purchase loans in many cases. For refinances, LTV is based on the current appraised value.
- Market appreciation: If your home appreciates, your LTV automatically drops if your loan balance remains steady—this can let you refinance into better terms or remove PMI. Regularly monitoring your home’s market value helps time these moves.
Special cases: cash-out refinance, second liens, and construction loans
- Cash-out refinance increases the loan amount against the appraised value, raising LTV and possibly changing program eligibility.
- Second mortgages and HELOCs count toward CLTV; lenders will evaluate combined exposure, not just the first mortgage.
- Construction-to-permanent loans may calculate LTV differently during the construction phase; expect stricter documentation and higher initial LTVs.
Investor-focused LTV rules and strategies
Lenders generally require lower LTVs for investment properties because these loans carry higher default risk. Typical investor LTV rules to expect:
- Single-family rentals: 70%–80% LTV typical for portfolio lenders.
- Multi-unit residential (2–4 units): often similar or slightly lower limits, depending on rental income history and vacancy assumptions.
- Portfolio and commercial loans: may be more conservative and underwrite to debt-service coverage ratios, not just LTV.
Strategy tip from my practice: when building a rental portfolio, plan for higher cash reserves and lower leverage on the first few properties to keep debt-service coverage and LTVs attractive to lenders. Also compare lender overlays—different banks and non-bank lenders have varying LTV tolerances.
For full investor-focused rules, see our related article: Investment Property Mortgages: What Real Estate Investors Must Consider (https://finhelp.io/glossary/investment-property-mortgages-what-real-estate-investors-must-consider/).
How to lower your LTV (practical steps)
- Make a larger down payment at purchase.
- Pay down your principal (accelerated payments or lump-sum payments).
- Refinance when equity reaches helpful thresholds—often when LTV falls to 80% or better.
- Contest or update your appraisal if you have evidence the initial appraisal was low (comps, improvements). Work with your lender and appraiser.
- Use gift funds or secondary financing carefully—remember second liens increase CLTV.
You can also explore lender programs that allow mortgage insurance layering or lender-paid mortgage insurance (LPMI), but compare long-term costs—LPMI can yield a slightly lower rate but raises monthly cost indirectly or complicates future refinancing.
Mistakes and misconceptions to avoid
- Mistake: Treating LTV as the only factor. LTV matters a lot, but lenders weigh credit, income, and property type too.
- Misconception: PMI is always removable automatically. While many conventional loans follow the Homeowners Protection Act, servicing practices vary—document your equity and request removal when eligible. See our article on removing mortgage insurance for timelines and tactics: When and How Mortgage Insurance Can Be Removed: A Timeline (https://finhelp.io/glossary/when-and-how-mortgage-insurance-can-be-removed-a-timeline/).
- Mistake: Overleveraging rental purchases. High LTVs on investment properties increase vulnerability to vacancy and rising rates.
Quick checklist before applying for a mortgage (LTV-focused)
- Know your target LTV and why (avoid PMI? qualify for conventional? reach a specific rate tier?).
- Get an estimate of your property’s market value and collect recent comps.
- Decide whether to use a second lien or achieve a larger down payment.
- Understand mortgage insurance rules for the product you choose (FHA, VA, conventional).
- Talk to multiple lenders to compare rate tiers and LTV overlays.
Regulatory and authoritative resources
- Consumer Financial Protection Bureau (mortgages and mortgage insurance): https://www.consumerfinance.gov/
- U.S. Department of Housing and Urban Development (FHA rules and MIP): https://www.hud.gov/
- U.S. Department of Veterans Affairs (VA home loan program): https://www.benefits.va.gov/homeloans/
This article is educational and reflects common lender practices as of 2025. Loan programs, premiums, and underwriting rules change frequently. For personalized guidance tailored to your finances and local market, consult a licensed mortgage professional or financial advisor.
References and further reading
- How Loan-to-Value Determines Mortgage Options — FinHelp (explains how LTV affects the loan products lenders will offer): https://finhelp.io/glossary/how-loan-to-value-determines-mortgage-options/
- How Mortgage Insurance Works and When It Ends — FinHelp: https://finhelp.io/glossary/how-mortgage-insurance-works-and-when-it-ends/
- Investment Property Mortgages — FinHelp: https://finhelp.io/glossary/investment-property-mortgages-what-real-estate-investors-must-consider/
Professional disclaimer: This content is for educational purposes only and is not financial, tax, or legal advice. Outcomes depend on individual circumstances; consult a qualified mortgage broker, lender, or financial advisor for recommendations specific to your situation.
