What Is LTV (Loan-to-Value Ratio)? Definition, Examples, and How It Works

LTV (loan-to-value ratio) is the loan amount divided by the appraised value of the property, expressed as a percentage. A 80% LTV

on a $400,000 home means a $320,000 loan.

Most conventional loans require LTV below 80% to avoid PMI. FHA allows up to 96.5% LTV. VA allows 100% (no down payment required). Jumbo loans typically cap at 80-85%.

This page covers what LTV is, how lenders calculate it, the LTV thresholds by loan type, how LTV differs from CLTV (combined loan-to-value) and HCLTV, the role of the appraisal in determining LTV, how PMI works and when it can be removed, the difference between LTV and the down payment, and the 4 common mistakes that lead to higher LTV. For the broader mortgage application context, see the mortgage application bank statement guide and the bank statement glossary.

TL;DR. LTV (loan-to-value) is the loan amount divided by the property’s appraised value, expressed as a percentage. The formula: LTV = (loan amount / appraised value) x 100. A 80% LTV on a $400,000 home means a $320,000 loan. Most conventional loans require LTV at or below 80% to avoid PMI. FHA allows up to 96.5%. VA allows 100% (zero down). Jumbo loans typically cap at 80-85%. LTV matters because it determines PMI requirements, interest rate, and approval odds. The 4 common mistakes: confusing LTV with down payment, ignoring the appraisal value (using the purchase price), not accounting for closing costs, and not considering CLTV when there are multiple liens.

What LTV (Loan-to-Value) Is

LTV is a percentage that compares the loan amount to the appraised value of the property. The formula is simple: loan amount divided by appraised value, multiplied by 100. For a $320,000 loan on a home appraised at $400,000, the LTV is 80%. For a $380,000 loan on the same $400,000 home, the LTV is 95%. The lender uses LTV to measure the risk of the loan: the higher the LTV, the less equity the borrower has in the property, and the more the lender stands to lose if the borrower defaults.

The “value” in LTV is the appraised value, not the purchase price. The appraisal is an independent professional assessment of what the property is worth, conducted by a licensed appraiser. The appraisal can come in lower than the purchase price (in which case the LTV is higher than the buyer expected) or higher than the purchase price (in which case the LTV is lower). The lender uses the appraised value because it is an objective measure of what the property could be sold for, which matters for the lender’s recovery in a foreclosure scenario.

A common failure mode is buyers who calculate LTV using the purchase price and assume the appraisal will match. If the appraisal comes in $20,000 below the purchase price, the LTV jumps by 5% (on a $400,000 home). The fix: assume the appraisal will be conservative, calculate the worst-case LTV, and make sure the loan still works at that LTV before committing to the purchase.

LTV Thresholds by Loan Type

Different loan programs accept different maximum LTVs. The most common programs and their LTV caps:

• Conventional (Fannie Mae, Freddie Mac): 97% maximum LTV for some first-time buyer programs, but 80% is the threshold for avoiding PMI. Most lenders offer the best rates at LTV below 75%.
• FHA: 96.5% maximum LTV (3.5% down payment minimum). The loan includes an upfront mortgage insurance premium (UFMIP) of 1.75% and annual MIP for the life of the loan if LTV is above 90% at origination.
• VA: 100% maximum LTV (zero down payment required). The VA funding fee (1.4-3.6% depending on service category and down payment) can be rolled into the loan. Most VA loans are at 100% LTV.
• USDA: 100% maximum LTV (zero down for eligible rural properties). Includes a guarantee fee of 0.35% annually.
• Jumbo (non-QM): 80-85% typical, varies by lender and investor. Some jumbo lenders go to 90% with strong compensating factors.

The 80% LTV threshold is the most important number for conventional loans because it determines whether PMI is required. PMI typically costs 0.5-1.5% of the loan amount annually, which can add $100-$300/month to a $300,000 loan. Borrowers who can put 20% down avoid this cost. For buyers who cannot put 20% down, lender-paid PMI (a slightly higher interest rate in exchange for no monthly PMI) is an alternative. For the PMI mechanics, see the LTV mechanism page.

How the Appraisal Determines LTV

The appraisal is the independent professional assessment of the property’s value, and it directly determines the LTV. For a purchase transaction, the lender orders the appraisal after the purchase contract is signed. The appraiser visits the property, compares it to recent sales of similar properties in the area (the “comps”), and produces a report with the appraised value. For a refinance transaction, the appraisal is similar but the “comps” are weighted toward recent sales rather than the original purchase price.

The appraisal can come in 3 ways relative to the purchase price: at the purchase price (LTV matches the down payment percentage), below the purchase price (LTV is higher than expected, may require renegotiation or more down payment), or above the purchase price (LTV is lower than expected, borrower has instant equity but no cash back at closing from a purchase).

A common failure mode is buyers in a hot market who waive the appraisal contingency to make their offer competitive. If the appraisal comes in low, they have to bring extra cash to closing or lose the deal. The fix: include an appraisal contingency in the offer, with a clear plan for what to do if the appraisal is low (renegotiate the price, split the difference with the seller, or walk away). For the broader mortgage process, see the mortgage prep and documentation page.

LTV vs Down Payment: The Difference

Down payment is the cash the borrower brings to the closing, expressed as a percentage of the purchase price. LTV is the loan amount expressed as a percentage of the appraised value. The two are related but not identical. For a $400,000 home with 20% down ($80,000) and a $320,000 loan, the down payment is 20% and the LTV is 80%. But if the appraisal comes in at $390,000, the LTV becomes 82% (320/390), even though the down payment is still 20% of the purchase price.

The down payment affects LTV only when calculated against the appraised value. If the down payment is 20% and the appraisal matches the purchase price, LTV is 80%. If the down payment is 20% and the appraisal is 5% below the purchase price, LTV is 82%. The borrower’s actual equity in the home (down payment plus any difference between purchase price and appraisal) is the equity the lender considers when calculating PMI removal eligibility.

For the comparison with other loan-to-value metrics (CLTV for combined loans, HCLTV for Home Equity combined), see the LTV comparison page. For examples at diffe

rent LTV percentages, see the LTV examples page.

How PMI Works and When It Can Be Removed

PMI (private mortgage insurance) is required for conventional loans when LTV is above 80%. PMI protects the lender if the borrower defaults, not the borrower. PMI typically costs 0.5-1.5% of the original loan amount annually, paid monthly as part of the mortgage payment. For a $300,000 loan, PMI adds $125-$375/month to the payment.

PMI can be removed in 3 ways: (1) automatically when LTV reaches 78% based on the original amortization schedule (typically after 5-7 years of payments), (2) by request when the borrower can demonstrate LTV is at or below 80% based on current market value (requires a new appraisal), or (3) by refinancing into a new loan without PMI (the new loan’s LTV must be at or below 80%).

For FHA loans, the equivalent is MIP (mortgage insurance premium). MIP works similarly but is structured differently: an upfront premium of 1.75% at closing, plus an annual premium for the life of the loan if the original LTV is above 90%. For FHA loans with original LTV at or below 90%, MIP can be removed after 11 years.

LTV and the Bank Statement

The bank statement’s role in LTV qualification is for the down payment and reserves documentation. The lender needs to verify that the borrower has the down payment funds available and that the funds are “seasoned” (sitting in the account for at least 60 days, with a clear paper trail for any large deposits). For a 20% down payment on a $400,000 home, the borrower needs to show $80,000 in the bank account, plus reserves (typically 2-6 months of PITI payments) for the lender to be confident the borrower can handle the new mortgage payment.

For self-employed borrowers using bank statement loans, the down payment verification is the same, but the income documentation is different. Self-employed borrowers typically have a 10-20% higher down payment requirement because the bank statement loan is considered higher risk than a W-2 mortgage. For the broader context, see the self-employed mortgage application page and the asset verification page.

The 4 Common LTV Mistakes

4 mistakes that consistently cause LTV problems at mortgage closing:

1. Confusing LTV with down payment. Down payment is a percentage of the purchase price. LTV is a percentage of the appraised value. They are equal only when the appraisal matches the purchase price. The fix: calculate LTV based on the appraised value, not the purchase price, especially when planning for a low appraisal scenario.

2. Using the purchase price instead of the appraisal value. LTV is based on the appraised value, not the purchase price. A buyer who offers $420,000 for a home that appraises at $400,000 has a different LTV than they planned. The fix: always run the math on the appraised value, and plan for an appraisal 5-10% below the purchase price.

3. Not accounting for closing costs. Closing costs typically run 2-5% of the loan amount. The borrower needs cash for the down payment plus closing costs. A buyer who puts 20% down on a $400,000 home and has 3% closing costs needs $92,000 cash, not $80,000. The fix: budget for closing costs separately, and confirm the bank statement shows the full amount before applying.

4. Not considering CLTV with multiple liens. If the borrower has a first mortgage and a HELOC (home equity line of credit), the combined loan-to-value (CLTV) is what matters for the second lender, not the LTV of either loan alone. The fix: when adding a second lien or refinancing, calculate the CLTV based on the total debt against the property.

Start with the Workflow

The fastest path is to start with the conversion step, which produces the data that every other step needs. The bank statement converter handles the PDF-to-Excel step in 2-5 minutes, with no upload to a server.

For a complete reference of the terms used throughout this article, see the bank statement glossary.