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What Is LTV Ratio? How to Calculate Loan to Value Ratio

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What Is LTV Ratio?

LTV stands for loan to value. Loan to value ratio is a percentage of a home’s value against the amount that you need to borrow as a loan. Your lender will use the LTV ratio to determine if you are eligible for a loan, and what loan amount you qualify for.

When you are getting qualified for a loan, your lender will look at your LTV ratio. Often, this ratio will affect the size of your loan and down payment, your interest rates, and whether or not you will need to pay for PMI on your loan.

Usually, people aim for an LTV of 80% or lower. If you meet this LTV ratio, you will often be abel to get better loan options and loan rates, and might help you avoid paying private mortgage insurance, or PMI. If your LTV is over 80%, you will probably have to pay private mortgage insurance to your lender.

LTV vs. CLTV

LTV stands for loan to value, and CLTV stands for combined loan to value. A combined loan to value ratio takes into account all of the loans that have been taken out on the property, such as HELOC loans or home equity loans. Your lender will probably look at both the LTV and CLTV to qualify you for a loan.

How to Calculate LTV Ratio

Calculating loan to value ratio is very simple! You can always find a loan to value calculator online, but you can also do this calculation yourself. To calculate the loan to value ratio, you divide your loan amount by the property value. Make sure you use the most current appraised value. For example, let’s say you are looking to purchase a house for $500,000 and have $100,000 to put down as a down payment. Your loan amount will be $400,000. To calculate your loan to value, divide $400,000 by $500,000 to get 0.8, or 80%, Your loan to value ratio is 80%!

Conclusion

Loan to value ratio refers to the percentage of loan you have divided by your home’s worth. To purchase a home, you usually want to aim for an 80% loan to value ratio or lower. If you meet these requirements, you will likely avoid paying things like private mortgage insurance, which is charged when you put less than 20% of the appraised value down on a piece of property.