How lenders use LTV today

Lenders use the Loan-to-Value (LTV) ratio to size up credit risk on a mortgage. A higher LTV means the borrower has less of their own money invested in the home and the lender stands to lose more if the borrower defaults. That risk assessment influences interest rates, underwriting approvals, mortgage insurance requirements, and refinance options (Consumer Financial Protection Bureau, https://www.consumerfinance.gov/).

LTV is one of several underwriting factors. Lenders also review credit history, debt-to-income (DTI) ratio, employment, and assets. But LTV often acts as a gatekeeper: hit the lender’s LTV limit and you may be denied or forced into more expensive loan features.

How to calculate LTV

The basic formula is simple:

LTV = (Loan Amount / Appraised Property Value) × 100

Example: A $240,000 mortgage on a $300,000 appraisal = ($240,000 / $300,000) × 100 = 80% LTV.

Note: Lenders may use the lower of the purchase price or appraised value when calculating LTV for purchase transactions. For refinances, the appraisal or an automated valuation may determine the value used.

Common LTV thresholds and what they mean

  • 80% and below — conventional benchmark for avoiding private mortgage insurance (PMI). Conventional loans with LTV ≤ 80% generally secure the best interest rates and avoid PMI on purchase financing (CFPB, https://www.consumerfinance.gov/ask-cfpb/how-can-i-cancel-private-mortgage-insurance-pmi-en-1986/).
  • 80%–90% — many conventional lenders will finance this range but PMI or lender-paid mortgage insurance becomes common, raising monthly costs.
  • Above 90% — higher rates, stricter underwriting, and limited conventional loan options. Government programs (FHA, VA, USDA) may allow higher LTVs with different insurance or guarantee structures (U.S. Department of Housing and Urban Development, https://www.hud.gov/; U.S. Department of Veterans Affairs, https://www.benefits.va.gov/homeloans/).

Different loan products have different allowable LTVs or combined-LTV (CLTV) limits. For instance, FHA purchase loans allow LTVs up to 96.5% with a 3.5% down payment for eligible borrowers, while VA and USDA programs can allow 100% financing for qualified applicants.

Combined LTV (CLTV) and HCLTV — why they matter

If you have a first mortgage plus a second lien (for example a home equity line of credit, or HELOC), lenders use CLTV or HCLTV to measure total borrowing against the property. CLTV = (first mortgage + second lien) / value.

When shopping a refinance or cash-out refinance, lenders look at CLTV or HCLTV to set maximum allowed borrowings. This affects the ability to take out home equity and the pricing of the refinance.

Relevant reading: see our guide comparing HELOCs and home equity loans for how second liens change total borrowing limits (Home Equity Loan vs HELOC: Uses and Risks).

Appraised value vs market value vs assessed value

Lenders typically use the appraised value produced by a licensed appraiser. Appraisals consider recent comparable sales, condition, and market trends. “Market value” and “assessed value” appear in other contexts—assessed value drives property taxes and can differ significantly from an appraisal.

If the appraisal comes in lower than expected, your LTV goes up (because the denominator shrinks), which can change loan terms or derail a sale unless the buyer increases the down payment or the seller adjusts price.

How LTV affects refinancing and cash-out options

Refinancing to a lower rate often requires meeting the lender’s maximum CLTV. Many conventional refinances limit cash-out to 80% CLTV on primary residences. FHA streamline and VA interest-rate reductions follow different rules but also hinge on allowable LTVs and program-specific limits.

If you have low or negative equity, check specialized strategies in our refinancing guide (Refinancing with Low Home Equity: Creative Alternatives).

Mortgage insurance and LTV: cancellation rules

Private mortgage insurance (PMI) protects the lender when LTV is above conventional limits. The Homeowners Protection Act (HPA) requires automatic termination of PMI once the LTV reaches 78% (based on the original value) if payments are current, and allows borrowers to request cancellation at 80% LTV (subject to other lender policies). See CFPB guidance on PMI cancellation (https://www.consumerfinance.gov/).

FHA borrowers pay an upfront mortgage insurance premium (MIP) and an annual MIP unless they meet program-specific cancellation rules; FHA MIP rules differ from PMI and are governed by HUD.

Practical examples from advisory work

In my practice as a CPA and CFP®, I often see these scenarios:

  • First-time buyers who put 3%–5% down face high LTVs (95%–97%) that mean higher monthly payments and PMI for conventional loans, or MIP for FHA loans. I advise budgeting for PMI and planning to reach the 80% LTV milestone as quickly as possible.
  • Homeowners who increased their down payment to 20% (LTV 80%) typically qualify for lower rates and no PMI. That shift often saves hundreds monthly and speeds up equity-building.
  • When the market rapidly appreciates, homeowners with initially high LTVs can reach lower effective LTVs faster, enabling refinance or removal of PMI sooner than expected.

Strategies to lower LTV and build equity

  • Increase your down payment when buying. The single most effective action to lower initial LTV.
  • Make principal-only payments when possible. Reducing the loan balance lowers LTV directly.
  • Refinance to a shorter-term loan if you can afford slightly higher payments; faster principal paydown reduces LTV quicker.
  • Use a piggyback structure (80–10–10) carefully: historically used to avoid PMI, but this adds complexity and a second lien. Evaluate total cost versus benefit.
  • Consider home improvements that raise appraised value, and then request a new appraisal or lender-accepted valuation for refinancing.
  • Explore mortgage assistance programs or down-payment grants for qualifying buyers to reduce initial LTV.

Common mistakes and misconceptions

  • Treating LTV as the sole decision metric. Lenders weigh LTV alongside credit, income, and DTI; a great LTV can still be outweighed by poor credit or insufficient income documentation.
  • Assuming assessed value equals appraisal value. Property tax assessments are not the same as an appraisal used for lending.
  • Overlooking second liens. A HELOC or home equity loan increases CLTV even if the first mortgage LTV is low.

Checklist before you apply for a mortgage or refinance

  • Obtain a current payoff balance and estimate remaining principal.
  • Order or review a recent appraisal and comparative market data.
  • Calculate CLTV if you have a second lien.
  • Check PMI rules for your loan type and when cancellation can occur (CFPB guidance on PMI cancellation).
  • Ask lenders about overlays — additional lender-specific limits beyond agency rules.

Where to learn more and next steps

Professional disclaimer: This article is educational and not individualized financial advice. Rules and program limits change; consult a licensed mortgage professional or financial advisor to apply these ideas to your situation.

Author credentials: I am a CPA and CFP® with 15+ years advising homeowners and mortgage borrowers. In my practice I focus on aligning mortgage structure with long-term financial plans to reduce cost and preserve flexibility.