What is LTV? Why Is It Important? A Mortgage Expert Explains

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If you’ve ever applied for a mortgage, you may have encountered the acronym LTV, which stands for loan-to-value. LTV is an important metric mortgage lenders use to help evaluate the potential risk of a loan application. We’ll cover what LTV is and why lenders consider it so important.

What is LTV?

So, what is LTV in real estate and why is it important? The acronym LTV stands for loan-to-value. Loan-to-value is a ratio that represents the percentage of a home’s value (or purchase price) that you’re borrowing using a mortgage loan.

Loan-to-value is important to mortgage lenders because it helps them evaluate the potential risk of a mortgage application – which we’ll explain more about in a moment.

How Loan-to-Value is Determined

Lenders determine your loan-to-value by dividing the loan amount by the value (or purchase price) of your home, then multiplying it by 100 to get a percentage.

For example, if you borrow $250,000 and your home is worth $500,000, the loan-to-value would be determined as follows:

$250,000 (loan amount) / $500,000 (home value) = 0.50

If we multiply the result by 100, we get a loan-to-value of 50%. In other words, the loan amount equals 50% of the value of the home. This is considered a very low risk loan-to-value by mortgage lenders.

For another example, let’s assume the home is worth $400,000 and you’re borrowing $320,000. Here’s how determining LTV would work:

$320,000 (loan amount) / $400,000 (home value) = 0.80

If we multiply the result by 100, we get 80%. In other words, the loan amount equals 80% of the value of the home. This is considered a moderate risk loan-to-value by mortgage lenders.

As you can see, it’s pretty simple to figure out LTV. However, if you’d rather not deal with the math on your own, you can always try our LTV calculator.

LTV Meaning
LTV stands for loan-to-value and represents the percentage of a home’s value (or purchase price) that you’re borrowing using a mortgage loan. LTV is important to mortgage lenders because it helps them evaluate the potential risk of a loan application.

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Why It’s Important to Lenders

Lenders are risk evaluators by nature. When considering a home loan application, they scrutinize various risk factors that can be lumped into four categories called the 4 C’s of credit: character, capacity, capital, and collateral.

Loan-to-value falls under collateral. In other words, loan-to-value is an important consideration as mortgage lenders evaluate how well the collateral (your home) secures the mortgage.

Mortgage offers with low loan-to-values are considered lower risk by mortgage lenders, which means they tend to have lower interest rates and costs than offers with high loan-to-values.

Mortgage offers with high loan-to-values are considered riskier by mortgage lenders, which means they tend to have higher interest rates and costs than low loan-to-value offers.

Lenders like low loan-to-values for several reasons:

  1. If the homeowner stops making payments, the property is more likely to sell for enough in a foreclosure sale to cover the entire loan balance and attorneys fees.
  2. Homeowners with low loan-to-values have a lot of equity in their homes and are more likely to maintain their homes and keep up with payments even if they run into financial trouble.
  3. Homeowners with a lot of equity are less likely to walk away from their mortgage if they run into financial trouble.
  4. A low loan-to-value hedges against changes in real estate values. The loan is more likely to remain fully secured by the value of the home even if home values decline.
Expert Tip
If you’re refinancing or purchasing with more than one mortgage on the home, the lender will take into account the LTV of the primary loan and the combined loan-to-value, or CLTV, of the secondary loan. If the secondary loan is a HELOC, the lender will also take into account the unused credit on the HELOC using a metric called HELOC combined loan-to-value, or HCLTV.

Why It Matters For Borrowers

Loan-to-value is important to homeowners because it has a direct impact on the interest rate and costs of the mortgage. If you have very little equity in your home, which means you have a high LTV, you can expect to pay a higher rate and costs than if your LTV was significantly lower.

So what is a good LTV? For most conventional, FHA, and VA home loans, the best pricing is for LTV ratios below 70%. In other words, to get the best mortgage deals, you want to have at least a 30% equity position in your home.

Frequently Asked Questions

What is the LTV?

The acronym LTV stands for loan-to-value. Loan-to-value is a ratio that represents the percentage of a home’s value (or purchase price) that you’re borrowing using a mortgage loan.

What does 80% LTV mean?

The acronym LTV stands for loan-to-value, which is a ratio that represents the percentage of a home’s value (or purchase price) that you’re borrowing using a mortgage loan. An 80% LTV means you’re borrowing 80% of the value of the home.

Is 100% LTV good?

A 100% LTV means you’re borrowing 100% of the value of your home. This could be risky because even a small decrease in the value of your home could cause you to be upside down in your mortgage. If you need to sell your home, you may need to come up with cash at closing to pay off the part of your mortgage balance not covered by the proceeds from the sale of the home.

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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.