Loan-to-Value Ratio: What It Is and Why It Matters
When you begin the homebuying process, you’ll come across a number of mortgage terms—some familiar, others not so much. One of the most important is the loan-to-value ratio, commonly called LTV.
What Is LTV?
Your loan-to-value ratio compares the size of the loan you’re applying for to the appraised value of the property you want to purchase. Lenders rely on this ratio to help measure the risk of approving a loan and to determine whether mortgage insurance will be required.
In simple terms: The higher your LTV, the more risk a lender may perceive.
LTV is most commonly used for mortgages, but it can also apply to refinancing and certain auto loans.
Why Lenders Look at LTV
While LTV is a key part of a loan decision, it’s just one piece of the bigger picture. Lenders—including Jet Direct Mortgage—evaluate additional factors such as:
Your credit score
Your income and ability to repay
The condition and type of property
Borrowers with strong credit profiles may be eligible for higher LTV loans. On the other hand, a high LTV might mean a higher interest rate, limited loan options, or the need for mortgage insurance to help reduce the lender’s risk.
Increase the down payment to $20,000 and the LTV drops to 80%.
The takeaway: The more you borrow, the higher your LTV—and the more risk the lender takes on.
LTV and Collateral
Loans that use LTV typically involve collateral. With a mortgage, the property itself secures the loan. If a borrower stops making payments, the lender has the legal right to take possession of the home through foreclosure.
While foreclosure is never a lender’s goal, collateral helps ensure they can recover funds if the loan goes unpaid. This is one reason lenders often prefer an LTV of 80% or lower—if they needed to sell the home, they’d have a better chance of recouping the loan amount.
If you owe more than the home is worth, your LTV exceeds 100%. This situation is known as negative equity or being “underwater” on a loan.
What Is Considered a Good LTV Ratio?
For most conventional mortgages, lenders look for an LTV of 80%. Borrowing above that typically requires private mortgage insurance (PMI), which protects the lender. Once your LTV drops below 80%—either by paying down your loan or the home appreciating in value—PMI can usually be removed.
For certain programs, such as FHA loans, you can qualify with as little as 3% down, which results in a much higher LTV (97%). These loans require mortgage insurance, sometimes for the life of the loan.
Home equity loans and lines of credit also affect your LTV. As you borrow against your home’s equity, your LTV increases. As the property value rises or the loan balance decreases, your LTV improves.
The Bottom Line
Your LTV ratio plays an important role in the mortgage approval process, but it’s not the only factor lenders consider. While aiming for an LTV of 80% is ideal, every borrower’s situation is different. Credit history, income, loan program, and other elements all contribute to the final decision.
If you’d like help understanding your LTV or exploring loan options that fit your goals, Jet Direct Mortgage is here to guide you every step of the way.
Experienced Chief Operating Officer with a 26 + year demonstrated history of working in the banking industry. Skilled in all aspects of the residential mortgage market . Strong business development professional with a Bachelor of Science (BS) focused in Business Administration and Management, from St. Joseph College. A direct endorsement underwriter and a licensed Mortgage Loan Originator.
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