LTV Ratio Explained: What Lenders Look For

When you apply for a mortgage, the loan-to-value (LTV) ratio is one of the first numbers a lender calculates. It affects how much you can borrow, the rate you're offered, and whether you'll pay PMI.

Knowing how LTV works helps you structure a purchase that gets financed, and on better terms.

What Is LTV?

The loan-to-value ratio compares your loan amount with the property's value and is expressed as a percentage.

LTV = (Loan Amount ÷ Property Value) × 100

Example:

• Property value: $400,000
• Loan amount: $320,000
• LTV: $320,000 ÷ $400,000 = 80%

An 80% LTV means you're borrowing 80% of the property's value and putting 20% down.

Why LTV Matters

To Lenders

LTV measures how much risk the lender carries if you default:

• Lower LTV = more equity cushion = lender more likely to recover their money
• Higher LTV = less cushion = higher risk of loss

To Borrowers

LTV affects:

• Loan approval: Higher LTV = harder to qualify
• Interest rate: Higher LTV = higher rate
• PMI requirement: Above 80% LTV typically requires PMI
• Loan programs available: Some programs have LTV limits

Common LTV Thresholds

Primary Residence

Investment Property

PMI and the 80% LTV Threshold

Private mortgage insurance (PMI) protects the lender if you default, and it's required on most loans above 80% LTV. It typically costs 0.5-1.5% of the loan amount annually.

You can avoid or remove PMI in several ways:

• Put 20% down (80% LTV)
• Wait until paydown or appreciation brings you to 80% LTV
• Refinance after your home's value increases
• Request removal at 80% LTV (may require an appraisal)

Key Takeaways

• LTV = Loan Amount ÷ Property Value
• Lower LTV = lower risk = better rates and terms
• 80% LTV is the main threshold, since loans above it usually require PMI
• Investment properties have stricter LTV limits (75-80% max)
• Appreciation can improve your LTV and your refinancing options
• Know your LTV before you negotiate with lenders

Lenders work out your LTV early in the process, and it helps to know the number before they do. With it in hand, you can structure a deal that gets approved on the best terms available to you.