What the Loan-to-Value (LTV) ratio means in real estate
The Loan-to-Value (LTV) ratio is a key financing metric that compares how much you borrow to the value of the property, expressed as a percentage. Lenders use LTV to gauge risk: higher LTVs mean less borrower equity and more lender risk; lower LTVs indicate more equity and lower risk.
Definition & formula
LTV = (Loan Amount ÷ Property Value) × 100
Example: a $400,000 loan on a $500,000 property → $400,000 ÷ $500,000 = 0.8 → LTV = 80%.
Why LTV matters
- Underwriting: Lenders set maximum allowable LTVs to control risk.
- Interest rates: Higher LTVs often mean higher rates because the lender’s exposure is greater.
- Mortgage insurance: High LTV loans commonly trigger private mortgage insurance (PMI) or similar requirements.
- Refinance & credit access: Lower LTV increases the chance of approval and better terms on refinances or equity loans.
Real-world examples & common ranges
- Residential mortgages: A typical maximum LTV is about 80% (20% down). Borrowing $450,000 on a $500,000 home = 90% LTV, often requiring mortgage insurance or higher rates.
- Commercial loans: Acceptable LTVs usually range 65%–80%; special programs can allow up to 90% in select cases. Example: $8,000,000 loan on a $10,000,000 building = 80% LTV.
- Hard money loans: LTVs commonly 60%–75% because these are higher-risk, short-term loans.
- HELOCs & refinances: LTV guides eligibility and pricing. Example: a $400,000 home with a $140,000 mortgage → LTV = 35% (strong equity).
- Loan structuring: If a program caps LTV at 75% and the loan limit is $350,000, the maximum property value you can buy is $350,000 ÷ 0.75 ≈ $466,667.
How to calculate LTV (quick)
- Get the current appraised or purchase value of the property.
- Determine the loan amount you plan to borrow.
- Divide loan amount by property value and multiply by 100 to get a percentage.
Ways borrowers can lower LTV
- Make a larger down payment at purchase.
- Pay down existing mortgage principal before refinancing.
- Improve property value through qualifying renovations or by obtaining a new appraisal.
At-a-glance summary
| Aspect | Details |
|---|
| Definition | Loan amount ÷ property value, expressed as a percentage |
| Formula | LTV = (Loan Amount / Property Value) × 100 |
| Impact on lending | Higher LTV = higher lender risk → may raise rates or require mortgage insurance |
| Common residential max LTV | Around 80% (20% down) |
| Commercial LTV range | Typically 65%–80% (special programs up to 90%) |
| Hard money LTV | Usually 60%–75% |
| Refinance considerations | Lower LTV improves approval chances and loan terms |
In short, the Loan-to-Value ratio is a fundamental real estate finance metric that affects how much you can borrow, what rates you pay, and whether you’ll need mortgage insurance—so calculate it early when planning a purchase, refinance, or investment.
