LTV defined: What’s “mortgage to worth” for a mortgage?

What does LTV mean?

Your “loan to value ratio” (LTV) compares the size of your mortgage loan to the value of the home. 

For example: If your home is worth $200,000, and you have a mortgage for $180,000, your loan to value ratio is 90% — because the loan makes up 90% of the total price.

You can also think about LTV in terms of your down payment. 

If you put 20% down, that means you’re borrowing 80% of the home’s value. So your loan to value ratio is 80%. 

LTV is one of the main numbers a lender looks at when deciding to approve you for a home purchase or refinance. 

Verify your mortgage eligibility (Jul 10th, 2020)

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LTV for mortgage vs. refinance

Lenders use loan-to-value calculations on both purchase and refinance transactions. But the math to determine your LTV changes based on the purpose of the loan. 

For a home purchase, LTV is based on the sales price of the home — unless the home appraises for less than its purchase price. When this happens, your home’s LTV is based on the lower appraised value, not the home’s purchase price.

With a refinance, LTV is always based on your home’s appraised value, not the original purchase price of the home. 

Loan to value is especially important when using a cash out refinance, as the lender’s maximum LTV will determine how much equity you can pull out of your home.

Verify your mortgage eligibility (Jul 10th, 2020)

How to calculate your loan to value ratio

Calculating your loan to value ratio is simple. All you do is take your loan amount and divide it by the purchase price — or, if you’re refinancing, divide by the appraised value. 

The loan to value ratio is always expressed as a percent. So if your result is 0.75, for example, your LTV is 75%. 

Loan to value ratio examples

Here are a few examples to illustrate the concept of loan-to-value for mortgages. 

LTV for a home that appraises above its purchase price

When you buy a home that appraises for more than the purchase price, your loan to value ratio is based on the purchase price rather than the appraisal. 

House price: $100,000Appraised value : $110,000Downpayment: $20,000Loan amount: $80,00080,000 / 100,000 = 0.8Loan-to-value: 80%

LTV for a home that appraises below its purchase price

If you’re buying a home and the appraised value is lower than the purchase price, your LTV is based on the appraised value instead. This will lead to a higher loan to value ratio. 

House price: $100,000Appraised value : $90,000Downpayment: $20,000Loan amount: $80,00080,000 / 90,000 = 0.89Loan-to-value: 89%

LTV for a mortgage refinance

As long as you don’t have a second mortgage on your home — like a home equity loan or home equity line of credit — LTV is calculated the same for a refinance as for a home purchase.

Just remember, you’ll use the appraised value rather than the purchase price. 

Home value: $100,000Loan balance: $80,000Equity: $20,00080,000 / 100,000 = 0.8Loan-to-value: 80%

What are CLTV and HCLTV? 

When you refinance with a second mortgage secured by the property, the loan to value calculation is a little different. You’ll have one or two new ratios to consider: 

The CLTV (Combined Loan To Value) measures your first and second mortgage combined against your appraised home value. CLTV applies to both home equity loans and home equity lines of credit The HCLTV (High Combined Loan To Value) measures your highest possible loan to value ratio, including any untouched balance on your second mortgage. HCLTV applies only if you have a home equity line of credit (HELOC)

Here’s how each one is calculated. 

CLTV: Refinancing with a home equity loan

Calculating CLTV is relatively simple. You add your first and second mortgage balances together, and divide this amount by the home’s appraised value. 

See below how the LTV differs from the CLTV. 

Home value: $100,000Loan balance: $80,000Second loan balance : $10,000Equity: $10,00080,000 / 100,000 = 0.8Loan-to-value: 80%(80,000 + 10,000) / 100,000 = 0.9CLTV: 90%

HCLTV: Refinancing with a home equity line of credit 

When you refinance with a home equity line of credit, a lender will consider your full second mortgage in its LTV calculation — even if you haven’t withdrawn the full amount available to you. 

Because of this, you actually end up with three measures of your loan to value. 

The standard LTV; the CLTV, which combines your first mortgage with the amount you’ve withdrawn from your second mortgage; and the HCLTV, which considers your full first and second mortgage balance, regardless of the amount you’ve withdrawn. 

Home value: $200,000Loan balance: $100,000Available second loan balance: $80,000Amount of second loan drawn out: $40,000Equity: $20,000100,000 / 200,000 = 0.5Loan-to-Value: 50%(100,000 + 40,000) / 200,000 = 0.7CLTV: 70%(100,000 + 80,000) / 200,000 = 0.9HCLTV: 90%

Whether you’re buying or refinancing, your loan’s loan-to-value is important because it helps to determine your mortgage rate and your loan eligibility.

Verify your refinance eligibility (Jul 10th, 2020)

Why LTV is important in real estate 

LTV is important when you buy a home or refinance because it determines how risky your loan is. 

The more you borrow compared to your home’s value, the “riskier” it is for lenders. That’s because if you default on the loan for some reason, they have more money on the line. 

That’s why all mortgages have a “maximum LTV” to qualify. The maximum loan to value can also be thought of as a minimum down payment. 

For example, the popular FHA loan program allows a down payment of just 3.5%. That’s the same as saying the program has a max LTV of 96.5% — because if you make a 3.5% down payment, the most you can borrow is 96.5% of the home price. 

What is a good loan to value ratio? 

From a lender’s perspective, an 80% loan to value ratio is ideal because it minimizes their risk of losing money if the borrower defaults. That’s why home buyers with 20% down, and an 80% LTV, get special perks like avoiding mortgage insurance. 

But — and it’s a big “but” — it doesn’t always make sense to aim for 80% LTV. Because a 20% down payment is simply not doable for many home buyers. 

Therefore, a good loan to value ratio depends on your home buying goals. For one person, 100% might be a good LTV. For another, 70% might be ideal. 

Here’s what to consider.

If your goal is to make a small down payment and buy a home sooner, look for one of these mortgage programs with high LTV allowances: 

USDA loan — 100% LTVVA loan — 100% LTVConventional 97 loan — 97% LTVHomeReady & Home Possible — 97% LTVFHA loan — 96.5% LTV 

If your goal is to get the lowest possible interest rate and minimize your overall loan costs, you should aim for a lower LTV. This usually means getting a conventional loan with 10%-20% down. 

Verify your home buying eligibility (Jul 10th, 2020)

High LTV loans for home buyers

There are a number of loan programs specifically geared toward homeowners with high LTVs. There are even some programs which ignore loan-to-value altogether.

Here is a brief review of the more common high-LTV loan types.

VA loan: up to 100% LTV allowed

VA loans are guaranteed by the U.S. Department of Veterans Affairs. 

VA loan guidelines allow for 100 percent LTV, which means that no down payment is required for a VA loan. 

The catch is, VA mortgages are only available to certain home buyers, including: 

Active-duty military service personsVeteransMilitary spousesMembers of the Selected Reserve or National GuardCadets at the U.S. MilitaryAir Force or Coast Guard Academy membersMidshipman at the U.S. Naval AcademyWorld War II merchant seamenU.S. Public Health Service officersNational Oceanic & Atmospheric Administration officers

Learn more about the benefits of 100% LTV VA financing here. 

USDA loan: up to 100% LTV allowed

USDA loans are insured by the U.S. Department of Agriculture. USDA loans allow for 100 percent LTV, with no down payment required. 

Many also know the program as “Rural Housing.” You can find USDA loans in rural parts of the country, but also in many suburbs.

Learn more about USDA financing and how to qualify here. 

FHA Loan: Up to 96.5% LTV allowed

FHA loans are insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD). 

FHA mortgage guidelines require a downpayment of at least 3.5 percent. Unlike VA and USDA loans, FHA loans are not limited by military background or location — there are no special eligibility requirements. 

FHA loans can be an especially good fit for home buyers with less-than-perfect credit scores.

Conventional loan: up to 97% LTV allowed

Conventional loans are guaranteed by Fannie Mae or Freddie Mac. Both groups offer 97 percent LTV purchase mortgages, which means you will need to make a downpayment of 3 percent to qualify. 

97 percent loans are available via most mortgage lenders, and private mortgage insurance (PMI) is often required. 

As compared to an FHA loan, conventional loans to 97 percent LTV are advised for homeowners with high credit scores. In most other cases, FHA loans are preferred.

High LTV mortgage refinances

High-LTV mortgages can be simpler for refinance transactions than they are for purchases. Multiple federal agencies make “no appraisal” or “streamline” refinance programs available to U.S. homeowners.

FHA streamline refinance

The FHA Streamline Refinance is a special refinance program for homeowners with FHA mortgages. Official guidelines for the FHA Streamline Refinance waive appraisal requirements, which means the home’s LTV doesn’t matter — a good thing if your property value did not increase.

VA streamline refinance

The VA Streamline Refinance is a special refinance program for homeowners with existing VA home loans. The official name of the VA Streamline Refinance is the Interest Rate Reduction Refinance Loan (IRRRL). It’s sometimes called the VA-to-VA loan. 

Similar to its FHA cousin, the VA Streamline Refinance does not require an appraisal, nor does it require the verification of income, employment or credit. 

USDA streamline refinance

The USDA Streamline Refinance is available to homeowners with existing USDA mortgages only. Like the FHA and VA streamline programs, the USDA refinance waives the need for a home appraisal. The program is currently in pilot phase, and available in 19 states. 

The mortgage relief refinance

Over the years, there have been a number of “mortgage relief refinance” programs designed to help homeowners who are underwater on their loans. 

Being “underwater” means you owe more on the home than it is currently worth. As a result, your LTV is over 100%. 

For example, imagine you have a mortgage out for $150,000 on a home that’s also worth $150,000. But your home loses value, and is now worth only $125,000. Your new loan to value ratio is 120%.

Having an LTV above 100% would normally disqualify you from refinancing. But with a special mortgage relief program, you can refinance an underwater home into a lower rate to make your mortgage more manageable. 

You can read about current mortgage relief refinance programs here. 

Find out if you qualify for a mortgage

Loan-to-value is the ratio of how much you’re borrowing compared to your home’s worth. It’s a simple formula, but it’s the basis for most mortgage lending.

Once you know your LTV, you can figure out which mortgages you’re likely to qualify for — and which lender offers the best rates for your situation. 

Verify your new rate (Jul 10th, 2020)

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