What Is a Maximum Loan-to-Value (LTV) Ratio?

Maximum Loan-to-Value Ratios Explained

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A maximum loan-to-value ratio is the hard cap on the amount of money a lender is willing to lend a borrower with a secured loan. It is often put in place on mortgages and car loans, and is relative to the value of the asset that is used as collateral for the loan.

Here’s how maximum loan-to-value ratios work. 

Definition and Examples of Maximum Loan-to-Value Ratios

A maximum loan-to-value ratio is a hard limit on the amount of money a lender is willing to provide you when you take out a secured loan. It refers to the amount of money they are willing to lend relative to the value of the property guaranteeing the loan. Maximum loan-to-value ratios apply when you take out secured loans with assets acting as collateral.

Lenders that extend mortgage and car loans generally establish maximum loan-to-value ratios. For example, Fannie Mae offers first-time homebuyers and homeowners looking to refinance with Fannie Mae various options for loans with a 97% maximum loan-to-value (LTV) ratio.

The maximum LTV ratio is calculated by dividing the amount you want to borrow by the appraised market value of the collateral guaranteeing the loan. This number is usually expressed as a percentage. For example, if you want to purchase a home valued at $250,000, and the maximum LTV ratio is 97%, the maximum amount of financing the lender would provide you would be $242,500 (97% of $250,000).

Traditionally, many conventional mortgage lenders set a maximum loan-to-value ratio of 80%, which means you have to make a 20% down payment to purchase a home. The 80% is the amount that the lender is willing to finance of the home's market value.

However, many lenders now offer alternatives that allow for lower down payments and higher maximum LTV ratios.

Higher maximum LTV ratios are riskier for lenders because there’s a higher chance of default, such as foreclosure on a home. This means you may have to pay mortgage insurance if you put down less than 20% when buying a house.

How Maximum Loan-to-Value Ratios Work

Maximum loan-to-value ratios prevent lenders from financing more than a certain percentage of some purchases or from loaning money that exceeds a certain percentage of collateral guaranteeing the loan. They require you to bring some money to the table, which can help reduce lender risk. They are very common for mortgages and car loans but can apply to other types of secured debt, as well.

To understand maximum loan-to-value ratios, it's first important to understand loan-to-value ratios in general. A loan-to-value ratio is determined by dividing the principal balance of the loan by the current appraised market value of collateral guaranteeing the loan.

For example, to determine the maximum loan-to-value ratio of a home mortgage, you would need the amount borrowed and the current appraised value of the home (often using a professional appraiser). You then would divide the amount borrowed by the current appraised value.

For example, if you wanted to take out a $100,000 loan to purchase a home currently appraised at $200,000, you would calculate the loan-to-value ratio by dividing $100,000 into $200,000 then express the result as a percentage. In this case, you would have a 50% loan-to-value ratio because you'd be borrowing 50% of the value of the house.

A maximum loan-to-value ratio is simply the maximum loan amount a lender is willing to approve you for based on what your collateral is worth.

Loans With Different Maximum LTV Ratios

Maximum loan-to-value ratios are usually established by lenders making secured loans, which are loans that are guaranteed by the underlying collateral. Mortgages and car loans are well-known examples of secured loans that generally have maximum loan-to-value requirements.

The specific maximum loan-to-value ratio will likely vary by lender and loan program. The lender may also have additional requirements, such as a minimum credit score or income level.

One example of a maximum loan-to-value ratio is Fannie Mae’s 97% Loan-to-Value Mortgage. This program sets a maximum loan-to-value ratio of 97%, or 105% with a Community Seconds subordinate lien. Fannie Mae offers this program to homebuyers who would otherwise qualify for a mortgage, but don’t have the means for a large down payment.

Another example is Federal Housing Administration (FHA) Streamlined Refinance loans, which have a maximum loan-to-value ratio of 97.75% with an appraisal.

There are also the Department of Veterans Affairs (VA) home loans that may offer higher maximum LTV ratios, such as up to 100%, for eligible veterans, service members, and survivors with full entitlement.

As mentioned, some mortgage lenders have a maximum loan-to-value ratio of 80%, which requires you to pay 20% upfront to secure the loan. If you’re able to secure a loan with a higher maximum LTV ratio, you may have to pay mortgage insurance. For example, you may be able to put down 10% to secure a mortgage with a maximum LTV of 90% and pay mortgage insurance along with your monthly mortgage payments. The good thing is that many mortgage lenders allow you to request the cancellation of mortgage insurance once your LTV ratio drops to 80% or less.

Key Takeaways

  • A maximum loan-to-value ratio establishes an upper limit on the amount of money a lender is willing to provide you, relative to the value of your collateral that guarantees the loan.
  • Most mortgage and car loan lenders set maximum loan-to-value ratios.
  • The loan-to-value ratio is calculated by dividing the amount of money you borrow by the value of your collateral. It's expressed as a percent.
  • You can reduce your loan-to-value ratio by making a larger down payment on a home or car loan, or by putting up collateral for a loan that is worth more than you want to borrow.