What is a Loan to Value Ratio and How to Calculate It
How Much of Your Home Do You Really Own?
A loan to value (LTV) ratio compares the size of the loan you're requesting to take out compared to the appraised value of the item you want to buy.
Lenders and others use LTVs to determine how risky a loan is, for loan approval or denial, and to determine whether mortgage insurance is required. A higher LTV ratio suggests more risk because there's a higher chance of default.
Put another way: The LTV ratio tells you how much of a property you truly own compared to how much you owe. The ratio is used for several types of loans, including home and auto loans (both purchases and refinances).
How to Calculate
To calculate an LTV ratio, divide the amount of the loan by the appraised value of the asset securing the loan.
Example: Assume you want to buy a home worth $100,000. You have $20,000 available for a down payment, so you'll need to borrow $80,000.
$80,000 (loan amount)/$100,000 (appraised value of the asset) = 0.80 (LTV).
Your LTV ratio will be 80% because the dollar amount of the loan is 80% of the value of the house. $80,000 divided by $100,000 equals 0.80 (which is the same as 80%–see how decimals and percentages are related).
You can find LTV ratio calculators online to help you figure out more complicated cases, such as those including more than one mortgage or liens.
Why It Matters
An LTV ratio helps lenders evaluate risk: The more they lend, the more risk they’re taking. If you're considered a higher risk for the lender then that usually means:
- It’s harder to get approved for loans.
- You may have to pay more (with a higher interest rate).
- You may have to pay additional costs, such as mortgage insurance.
If you’re calculating LTV, you’re probably dealing with a loan that is secured by some type of collateral. For example, when you borrow money to buy a home, the loan is secured by a lien on the house. The lender can take possession of the house and sell it through foreclosure if you fail to pay off the loan. The same goes for auto loans—your car can be repossessed if you stop making payments.
Lenders don’t really want your property—they just want to get their money back quickly. If they only lend up to 80% (or less) of the property’s value, they can sell the property at less than the top dollar to recover their funds. That’s easier than holding out for a great offer.
Likewise, whatever you bought might have lost value since you bought it, so lending 100% or more puts lenders at risk.
Finally, when you’ve put some of your own money into a purchase, you’re more likely to value it and keep making payments. You’ve got skin in the game, so you’re not going to walk away unless you’re out of options.
Good LTV Ratios
What is a good LTV ratio that can help you get approved for a loan? It depends on your lender’s preference and the type of loan. You’ll often have better luck with more equity invested, which give you a lower LTV ratio.
With home loans, 80% is a magic number. If you borrow more than 80% of a home’s value, you’ll generally have to get private mortgage insurance (PMI) to protect your lender. That’s an extra expense, but you can often cancel the insurance once you get to below 80% LTV.
Another notable number is 97%. Some lenders allow you to buy with 3% down (FHA loans require 3.5%)—but you’ll pay mortgage insurance, possibly for the life of your loan.
With auto loans, LTV ratios often go higher, but lenders can set limits (or maximums) and change your rates depending on how high your LTV ratio will be. In some cases, you can even borrow at more than 100% LTV because the value of cars can decline more sharply than other types of assets.
When the LTV ratio is higher than 100%, the loan is larger than the value of the asset securing the loan (you have negative equity). It's typically not a good situation, because you’d have to pay something to sell the asset—you wouldn’t get any money out of the deal. These types of loans are often called "underwater" loans.
After home values dropped during the mortgage crisis, underwater home loans were a major problem. Underwater auto loans are always an issue. If you borrow with a high LTV ratio, make sure there’s a good reason for taking the risk.
Different Types of Equity
Keep in mind: Your equity doesn't have to be in the form of money that you bring to the deal. If you own property (or a portion of a property), your ownership interest can be used as equity, and the value of that interest can change over time.
For example, when you borrow against your house with a home equity loan, you're using your home's value and effectively increasing your LTV ratio when you get a loan. If your home gains value because housing prices rise, your LTV will decrease (although you might need an appraisal to prove it). Likewise, if you’re borrowing money to build a new home, you can use the land you’re building on as equity for a construction loan.
The Bigger Picture
LTV ratios are extremely important. But they’re part of a bigger picture, which includes:
- Your credit scores (with good credit it’s easier to get higher LTV loans)
- Your income available to make monthly payments
- The asset that you’re buying (Is it a house in good shape or a multifamily unit? Is it a new or used vehicle? Motorcycle or RV?)
In addition to your credit, one of the most important things for lenders is your debt-to-income ratio. That is a quick way for them to figure out how affordable any new loan will be. Can you comfortably take on those extra monthly payments, or are you getting in over your head?
Quicken Loans. "LTV: Loan-to-Value Explained." Accessed March 19, 2020.
Bank of America. "How to Calculate Home Equity and Loan-to-Value (LTV)." Accessed March 19, 2020.
Lending Tree. "Why Loan-To-Value Ratio Matters." Accessed March 19, 2020.
MyCreditUnion.gov. "Personal Loans: Secured vs. Unsecured." Accessed March 19, 2020.
IFS Auto Loans. "What Is a Loan to Value Ratio?" Accessed March 19, 2020.
Business Dictionary. "Underwater Loan." Accessed March 19, 2020.
U.S. Dept of Housing. "Negative Equity in the United States." Accessed March 19, 2020.
Arbor Financial Credit Union. "Construction Loans: Can You Use Land as a Down Payment?" Accessed March 19, 2020.
Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed March 19, 2020.