What is Loan-to-Value (LTV) and why does it matter for borrowers?

Loan-to-Value (LTV) is one of the first numbers underwriters check when deciding whether to approve a mortgage or refinance. It measures how much of a property’s value is financed by the loan and how much the borrower has at risk (equity). Because it is a direct proxy for the lender’s exposure if a borrower defaults, LTV affects pricing, eligibility, mortgage insurance, and options for future loan changes.

Below I explain how LTV is measured, how lenders use it, common thresholds for consumer mortgages, and practical steps you can take to improve your position. I also link to relevant articles on FinHelp that explain related topics in depth, including how appraisals and PMI rules affect LTV outcomes.

How LTV is calculated (simple formula and examples)

The basic formula is:

LTV = (Loan amount ÷ Appraised value or purchase price) × 100

Example 1 — Purchase:

  • Purchase price / appraised value: $300,000
  • Loan requested: $240,000
  • LTV = 240,000 ÷ 300,000 × 100 = 80%

Example 2 — Refinance:

  • Current appraisal: $350,000
  • Existing mortgage balance: $280,000
  • LTV = 280,000 ÷ 350,000 × 100 = 80%

Note: For purchases lenders usually use the lower of the contract price or appraised value. For refinances, they typically use the current appraised value, or an automated valuation method (AVM) in some streamlined cases.

Key LTV thresholds and what they mean (2025 guidance)

  • 80% LTV: A common breakpoint for conventional loans. Borrowers at or below 80% LTV generally avoid private mortgage insurance (PMI) and qualify for the best pricing tiers for many lenders (source: Freddie Mac guidance; see links below).
  • 78% LTV: Under the Homeowners Protection Act, lenders must automatically terminate PMI on conventional loans once the loan reaches 78% of original value, provided the borrower is current. Borrowers can request cancellation at 80% LTV if they meet other conditions (source: CFPB).
  • 96.5% LTV: Maximum typical LTV for an FHA purchase with a 3.5% down payment (FHA-insured programs allow higher LTVs but include up-front and annual mortgage insurance premiums).
  • 100% LTV: Some VA loans offer no down payment for eligible veterans and service members. These programs have separate entitlement and underwriting rules (source: VA Home Loan program documents).

Different loan programs and lenders maintain overlays that can tighten these thresholds (for example, requiring a lower LTV for borrowers with weaker credit or nonstandard income). If you see a quoted LTV threshold, ask the lender whether any overlays apply.

Variations of LTV lenders consider

  • CLTV (Combined Loan-to-Value): Includes the balances of both first and second mortgages divided by property value. CLTV matters when you have a HELOC or second mortgage.
  • HCLTV (Home Equity Combined Loan-to-Value): Used for HELOCs and some purchase transactions; it assumes the maximum draw on a HELOC to assess worst-case combined exposure.
  • LTV vs Loan-to-Cost (LTC): For construction loans, lenders often use loan-to-cost (loan amount ÷ construction cost) rather than market value.

Why LTV changes underwriting and pricing

Lenders price risk. A high LTV means less borrower equity cushion if the property value falls. Practical consequences include:

  • Higher interest rates or pricing adjustments.
  • Requirement to carry mortgage insurance (PMI on conventional loans, MIP on FHA loans).
  • Restrictions on cash-out refinances — many programs cap cash-out LTVs.
  • Additional documentation or tighter credit overlays.

In my experience working with borrowers and underwriters, even a 1–2% difference in LTV can move a borrower into a different pricing tier. That small gap can translate to hundreds of dollars over the life of the loan.

Real-world examples and common scenarios

1) Low down payment purchase

  • Buyer A puts 3% down on a $400,000 home and seeks a $388,000 loan. LTV ≈ 97%. Because this is above 80% and in FHA/other high-LTV territory, the lender charges mortgage insurance and may require stricter credit or reserve requirements.

2) Refinancing after price appreciation

  • Borrower B owes $260,000. A new appraisal shows the home is worth $350,000. LTV ≈ 74% — the borrower may now refinance into a lower-rate loan without PMI and possibly remove mortgage insurance entirely.

3) Second liens and CLTV

  • Borrower C gets a $50,000 HELOC while still carrying a $200,000 first mortgage on a home valued at $300,000. First mortgage + HELOC = $250,000 ÷ $300,000 = CLTV 83%. That CLTV determines whether new financing options are available and how they’re priced.

Appraisals, valuation methods, and timing

  • Appraised value: For most purchases and many refinances, lenders rely on a licensed appraiser’s report.
  • Automated valuation models (AVMs) and broker price opinions (BPOs): Used in some streamlined refinance programs; they can produce different valuations and thus different LTVs.
  • Use the lower of appraised value or contract price for purchases — that can push LTV higher if a home is over- or under-priced.

If your appraisal comes in low, you can ask for a reconsideration of value, provide comparable sales data, or negotiate the purchase price — but those options take time and are not guaranteed to succeed. Read more about appraisals and how they affect mortgage approval in our article, “How Property Appraisals Impact Mortgage Approval.” (internal link)

How LTV affects mortgage insurance (PMI, FHA MIP, VA funding fee)

  • Conventional loans: Private mortgage insurance (PMI) is generally required above 80% LTV. Borrowers can request cancellation once the loan balance reaches 80% of the original value; automatic termination occurs at 78% if payments are current (Homeowners Protection Act). See the CFPB guide for details.
  • FHA loans: FHA requires an up-front mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The required MIP can remain for the life of the loan depending on the original LTV and loan term (source: HUD/FHA).
  • VA loans: Instead of monthly mortgage insurance, VA-guaranteed loans charge a one-time funding fee (unless exempt). The lack of PMI is one reason many eligible veterans opt for VA loans despite the VA funding fee.

For strategies on removing mortgage insurance after you cross LTV thresholds, see our guide “Mortgage Insurance Cancellation: How and When You Can Remove PMI.” (internal link)

Practical ways to lower your LTV (and why each helps)

  • Increase your down payment: The most direct way to reduce LTV at purchase.
  • Make a principal payment: Paying down your loan reduces LTV immediately.
  • Refinance after appreciation: If the market value rises and a new appraisal supports it, your refinance LTV may drop.
  • Use gift funds or down payment assistance: Some structured programs allow gift funds that reduce the needed loan amount, lowering LTV; confirm program rules and lender acceptance.
  • Consider a piggyback loan carefully: An 80/20 split (first mortgage at 80% and second at 20%) can avoid PMI, but you will pay interest on two loans and potentially higher rates on the second.

When LTV is only one part of the decision

Lenders combine LTV with other underwriting factors such as credit score, debt-to-income (DTI) ratio, employment history, and assets. A borrower with a slightly higher LTV but excellent credit and low DTI can still receive competitive pricing. For more on how DTI interacts with LTV, see our piece on “How Debt-to-Income (DTI) Affects Mortgage Approval.” (internal link)

Common borrower mistakes and how to avoid them

  • Assuming purchase price = final value: Always account for appraisal risk. If the appraisal is lower than contract price, your LTV may be higher than expected.
  • Ignoring combined liens: Not counting a HELOC or second mortgage can surprise you with a higher CLTV.
  • Forgetting PMI rules: Some borrowers continue paying PMI after they are eligible for cancellation — track your balance and request cancellation when eligible.

Checklist for borrowers before applying

  • Request a preliminary LTV estimate from multiple lenders using the expected purchase price or current appraisal.
  • Compare program rules (conventional, FHA, VA) and the LTV breakpoints that trigger insurance or different pricing.
  • If appraisal risk is a concern, budget for a larger down payment or use contingency language in offers.
  • Keep documentation of home-improvement investments when you ask for a higher appraisal after renovations.

Professional tips from the field

  • Even small increases in home value or a modest down payment can move you below an LTV threshold and save thousands in PMI and interest over the loan lifecycle.
  • For borrowers close to key LTV breakpoints, run the numbers both with and without minor principal prepayments — lenders will often show how a one-time $5,000 payment changes your LTV and pricing.
  • If you’re refinancing, ask whether a full appraisal is necessary or an AVM will be used — that choice can change your LTV outcome and closing costs.

Sources and further reading

Professional disclaimer

This article is educational and not personalized financial advice. Lenders’ underwriting rules and program terms change; consult a mortgage professional or financial advisor for guidance tailored to your situation.

Internal links referenced in this article:

If you want, I can run sample LTV calculations for your specific purchase price, down payment, or current balance and show how different scenarios affect PMI and pricing.