Family being shown potential home by real estate agent

What is LTV or loan-to-value ratio on a mortgage?

From ARM to VA, there are dozens of abbreviations related to the mortgage process. Understanding this shorthand terminology is helpful when navigating homebuying. At times it may seem like you’re learning a new language in addition to buying a new home! We’re here to help.

One useful term is the financial metric known as LTV or loan-to-value ratio. LTV ratio measures lending risk by comparing the loan amount to what your property is worth. The higher the ratio, the riskier the loan. LTV is a consideration in determining whether or not a borrower qualifies for a new home loan or a refinance loan.

How can I calculate the LTV on a mortgage?

During the mortgage process, an underwriter will evaluate such things as credit history, assets, income and debts. The value and condition of the purchase property, the sales price and LTV ratio will also be assessed. Here’s how to calculate the LTV ratio yourself:

LTV = (mortgage loan amount ÷ appraised property value) x 100

  • For a purchase transaction, take the mortgage amount divided by the sale price of your home or home’s appraised property value, whichever is lower, then multiply by 100.

LTV = (mortgage loan amount ÷ appraised property value or home sales price) x 100

What is a good loan-to-value ratio?

While there is no standard “good” loan-to-value ratio, a ratio of 80% or lower is better for more favorable mortgage loan terms. When buying a home with less than  20% down, your LTV ratio will be higher than 80%. Don’t worry; a higher ratio doesn’t necessarily prevent you from being approved for a mortgage. It may mean that you’ll be required to purchase private mortgage insurance (PMI).

The minimum down payment and maximum LTV options for a mortgage are:

The good news is that your LTV ratio can improve over time. As you pay down your loan and your home value increases, your LTV will decrease. You may then qualify to refinance without mortgage insurance, which can save you money each month.

Pre-approval for a home loan gives you direction on what homes you may be able to afford, as well as how much you should save for a down payment to lower your LTV. Mortgage advisors are here to answer all of your mortgage questions until you’re fluent in the language of the homebuying process. Connect with an experienced loan officer today.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.