Loan-to-value (LTV) ratio is the percentage of an asset's value financed by a loan, calculated as loan amount ÷ appraised value × 100. A $270,000 mortgage on a $300,000 home is a 90% LTV — the lender is financing 90% of the home's value, and you're contributing 10%.
Why Lenders Care So Much About LTV
LTV is one of the first numbers any lender calculates because it directly reflects risk. A borrower with a low LTV has more equity in the property, meaning if they default, the lender is more likely to recover the full loan balance through foreclosure and resale. A borrower with a high LTV has thin equity, so even a small drop in property value could leave the lender holding a loan larger than the collateral is worth.
This is exactly why LTV determines so much of your loan terms — interest rate, whether private mortgage insurance (PMI) is required, and sometimes whether you're approved at all. On conventional mortgages, crossing the 80% LTV threshold (putting down at least 20%) typically eliminates the need for PMI, which can save hundreds of dollars a month.
Worked Example
Take a home appraised at $400,000. The buyer puts down $60,000 and finances the rest.
| Item | Detail | Value |
|---|---|---|
| Appraised value | — | $400,000 |
| Down payment | 15% | $60,000 |
| Loan amount | $400,000 − $60,000 | $340,000 |
| LTV | $340,000 ÷ $400,000 | 85% |
At 85% LTV, this buyer is above the 80% threshold, so most conventional lenders will require PMI — typically 0.5-1.5% of the loan amount annually ($1,700-$5,100/year here) — until the LTV drops to 80% or below through payments or appreciation.
LTV Bands and What They Typically Mean
- Under 80% LTV: Best rates, no PMI required on most conventional loans.
- 80-90% LTV: PMI required; still generally good rates, common for first-time buyers.
- 90-97% LTV: Higher PMI cost, may require specific loan programs (FHA, certain conventional low-down-payment products).
- Above 97% LTV: Rare outside specialized programs like VA loans (which can go to 100% with no PMI for eligible veterans).