Simple mortgage definitions: Loan-to-Value (LTV)

Dan Green
The Mortgage Reports contributor
What is loan-to-value?

Loan-to-value is a mortgage term that compares the size of your loan to the home’s value. For example, if you’re buying a house for $300,000, and you take out a $285,000 mortgage, you have a 95% loan-to-value ratio (or “LTV”). For refinancing, the loan-to-value math is the same, but the ratio is based on the newly appraised value instead of the purchase price. The loan-to-value ratio is used by lenders to set your mortgage rate and terms when you buy a house or refinance. 

Verify your mortgage eligibility today (Jul 4th, 2020)

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Simple mortgage definitions: loan-to-value (LTV)

Loan-to-Value or LTV is the amount of money you’re borrowing as a percentage of your home’s value.

Lenders use loan-to-value calculations on both purchase and refinance transactions. The math to determine your LTV may vary based on loan purpose, however.

With a refinance, the LTV is equal to your loan size divided by your home’s appraised value. For a 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.

Verify your mortgage eligibility regardless of LTV. (Jul 4th, 2020)

LTV examples

Here are four simple examples to illustrate the concept of loan-to-value :

Buying a home that appraises for more than its purchase price

  • House price: $100,000
  • Appraised value : $110,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • Loan-to-value: 80 percent

Buying a home that appraises for less than its purchase price

  • House price: $100,000
  • Appraised value : $90,000
  • Downpayment: $20,000
  • Loan amount: $80,000
  • Loan-to-value: 89 percent

Refinancing a home with no second mortgage

  • Home value: $100,000
  • Loan balance: $80,000
  • Equity: $20,000
  • Loan-to-value: 80 percent

Refinancing a home with a second mortgage

  • Home value: $100,000
  • Loan balance: $80,000
  • Second loan balance : $10,000
  • Equity: $10,000
  • Loan-to-value: 90 percent

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

Verify your mortgage eligibility (Jul 4th, 2020)

High LTV loans for home buyers

Loan-to-value is a key factor in your ability to get approved for a mortgage. In general, lenders prefer loans with low LTV because loans with low LTV represent less risk to the bank.

That said, 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 percent financing allowed

VA loans

are loans 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. VA mortgages are available to certain active-duty military servicepersons, veterans, military spouses, members of the Selected Reserve or National Guard, cadets at the U.S. Military, Air Force or Coast Guard Academy members, midshipman at the U.S. Naval Academy, World War II merchant seamen, U.S. Public Health Service officers and National Oceanic & Atmospheric Administration officers, among other groups.

USDA loan: up to 100 percent allowed

USDA loans

are loans 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.

FHA Loan: Up to 96.5 percent allowed

FHA loans

are loans 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 percent allowed

Conventional loans

are loans 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.

Verify your mortgage eligibility (Jul 4th, 2020)

High LTV loans For refinancing households

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.

Read more about the FHA Streamline Refinance here

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. Read more about the VA Streamline Refinance here.

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. Read more about the USDA Streamline Refinance here.

What is your maximum loan-to-value?

Loan-to-value is the ratio of how much you’re borrowing to home much your home is worth. It’s a simple formula but the basis for most mortgage lending. If you can grasp how LTV works, you can better pick the mortgage that suits your needs best.

Start here to see what kind of mortgage rates you can get with your current LTV. Rates are available 24/7, and they’re free.

Verify your mortgage eligibility (Jul 4th, 2020)

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