LTV (Loan-to-Value Ratio)
Loan amount divided by the appraised property value. A $320,000 loan on a $400,000 home is 80% LTV. Lower LTV means more equity, lower lender risk, and typically better rate pricing. LTV above 80% on conventional loans triggers PMI requirements.
How it works in practice
LTV drives pricing more directly than most borrowers realize. Conventional loans price through loan-level adjustments that step at LTV bands — the same borrower pays measurably more at 95% LTV than at 75% — and crossing 80% adds private mortgage insurance on top. Non-QM programs express risk the same way but with harder ceilings: bank statement and 1099 loans commonly cap at 80–90% LTV, DSCR programs at 75–80%, asset depletion lower still.
The denominator is the appraised value or the purchase price — whichever is lower, on a purchase. That rule surprises buyers in competitive markets: paying $420,000 for a home appraising at $400,000 doesn't create a 95% LTV loan on the appraisal; the loan is measured against $400,000 and the $20,000 gap comes out of your pocket. On refinances the appraisal alone carries the calculation, which is why value opinions matter so much there.
For self-employed borrowers, LTV is also a negotiating lever: a lower LTV is one of the strongest compensating factors available. Files that miss on DTI or documentation depth frequently approve at 70–75% LTV when they'd decline at 90% — and non-QM pricing improves in visible steps with every 5% of additional equity.
Common questions
What LTV do I need to avoid PMI?
On conventional loans, 80% or below — either a 20% down payment or, on a refinance, 20% equity. PMI isn't forever regardless: it cancels on request at 80% LTV based on the original value and terminates automatically at 78%.
Is a higher LTV ever the right choice?
Often. Preserving cash for reserves — itself a compensating factor — can beat squeezing to 80%. Run the pricing at both LTVs: sometimes the rate-plus-PMI cost of 90% financing is worth the liquidity, especially for business owners who need working capital.
Related terms
- CLTV (Combined LTV) — Total of all liens on the property (first mortgage + any HELOCs or second mortgages) divided by property value…
- Pre-approval — A conditional commitment from a lender based on a full review of your income documents, assets, debt obligatio…
- Pre-qualification — A preliminary, informal estimate of how much you might borrow, usually based on self-reported information with…
- Underwriting — The lender’s detailed verification and risk assessment of your application. An underwriter reviews income, ass…
- Compensating factors — Strengths in your application that offset a weakness elsewhere. Common examples: large reserves offsetting a h…
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Sources
Educational definition only — not financial, legal, or tax advice. Programs and limits change; verify current terms with a licensed professional.