Applying for a loan? You've probably run into the words LTV ratio before.

In a process full of jargon, another 3-letter acronym is probably the last thing you want to see. Luckily, we wrote this quick guide to help you:

• Demystify the loan-to-value ratio
• Learn how to calculate LTV
• Understand when and how to use it
• Tips to minimize it

Let's jump straight in!

But first — are you a homeowner? If you're looking for a loan,  you can tap into your property's value to access loans at much better rates than unsecured personal loans. Lotly works with a nationwide network of lenders to find you the best options: book a free consultation today.

The definition of loan-to-value ratio

The loan-to-value (LTV) ratio is a financial measure lenders use to assess the risk of a mortgage or other type of loan. It represents the amount of money borrowed compared to the value of the purchased asset, with higher LTV ratios indicating a higher level of risk for the lender.

Intuitively, it's a way for a lender to measure the potential loss they could incur if the borrower defaults on their loan.

• A low LTV (under 80%) is generally considered less risky, as it means the borrower likely already has equity in the asset and is less likely to default.
• A high LTV (over 80%) is considered riskier, as it means the borrower has less equity in the asset and may be more likely to default.

LTV & loan approval

In general, lenders prefer lower LTV (under 80%) ratios as it means that the borrower is putting more money down and has a larger equity stake in the asset.

This reduces the risk for the lender because the borrower has more to lose if they default on the loan — a signal for them to give you better rates.

How to calculate the LTV ratio

Loan to value ratio is given by the formula:

LTV = (Loan Amount / Appraised Value) x 100%

Expressed as a percentage where,

• Loan Amount is the amount borrowed
• Appraised Value is the estimated value of the asset

For example, if you are buying a house for $200,000 and taking out a loan of $160,000, your LTV ratio would be calculated as follows:

LTV = ($160,000 / $200,000) x 100% = 80%

This means that your LTV ratio is 80%, which indicates that you are borrowing 80% of the total value of the property.

LTV and home equity loans

LTV ratios are not just important for mortgages, but also for home equity loans. These are loans where you use the equity in your home as collateral to borrow money.

The LTV ratio for a home equity loan or home equity line of credit is calculated similarly to that of a mortgage, with the difference being that the loan amount is based on the available equity in your home rather than the total value.

For example, if your home is worth $300,000 and you have an outstanding mortgage balance of $200,000, then you would have $100,000 in available equity. If you were to take out a home equity loan of $80,000 against that available equity, then your LTV ratio would be:

LTV = ($80,000 / $100,000) x 100% = 80%

This means that you are borrowing 80% of the available equity in your home.

When do I need to know my LTV ratio?

There are a few scenarios when you need to calculate your LTV ratio:

• When applying for a mortgage or a home equity loan: Lenders will use your LTV ratio to determine the amount they are willing to lend you and what interest rates they will offer.
• When refinancing your mortgage: If you want to refinance your existing mortgage, lenders will again look at your LTV ratio to see if you have enough equity in the property.
• When buying an investment property: Knowing their LTV ratio can help real estate investors assess the risk of taking out a loan for a particular property.

What happens with a high LTV ratio?

A high LTV ratio occurs when you borrow a larger percentage of the asset's value, usually over 80%. This can happen due to several reasons including:

• You may not have enough savings or funds to cover a larger down payment.
• The property may be overvalued and you’re unaware of its true market value.
• The borrower has multiple loans or debts, resulting in a higher debt-to-income ratio which affects their ability to make a larger down payment.

Generally, you don't want a high LTV ratio because:

• Lenders may view a high LTV ratio as risky, resulting in them denying the loan application or charging higher interest rates.
• You may need to pay for private mortgage insurance (PMI). This is an additional cost that protects the lender in case you default on the loan.

If you need more personalized guidance on what kind of loan options are best for your particular situation, get in touch with Lotly — we can help.

How to improve LTV ratios

• Making larger down payments. This is one of the most effective ways to improve your LTV ratio. The more money you put down on a property, the less you have to borrow and the lower your LTV ratio will be.
• Paying off existing debts. As mentioned earlier, having multiple loans or debts can increase your debt-to-income ratio and affect your ability to make a larger down payment. By paying off these debts, you can improve your overall financial situation and potentially lower your LTV ratio.
• Improving credit score. A higher credit score not only improves your chances of getting approved for a loan but also allows you to get better interest rates. This can help reduce the amount you need to borrow and  in turn, improve your LTV ratio.

The combined loan-to-value (CLTV) ratio

The combined loan-to-value (CLTV) ratio is an essential metric in determining your ability to secure additional loans against a property, like a home equity line of credit.

Unlike the standard LTV ratio, which considers just the primary mortgage, the CLTV ratio factors in all loans secured by the property, including second mortgages, home equity loans, and lines of credit. In other words, it’s the ratio of all loans against a property (through the combined balance of your secured loans) to the value of the property itself.

The formula looks like this:

CLTV Ratio = (Combined Secured Loan Balance) / Appraised Property Value

A lower CLTV ratio shows that you have more equity in your property and are therefore a less risky borrower. It can also improve your chances of getting approved for additional loans or refinancing options.

Lenders use the CLTV ratio to assess the total risk of lending you money.

• A lower CLTV ratio signifies that you have more equity in the property, which can make lenders more confident in approving additional loans.
• However, if the CLTV ratio is too high, it may be difficult to obtain further financing as lenders might view the risk of default as greater.

Keeping your CLTV ratio at a manageable level is crucial for maintaining financial flexibility and accessing further borrowing options.

Get a customized home equity loan with Lotly

Let's recap what we've learned so far:

• Understand the importance of LTV in loan approval. The loan-to-value (LTV) ratio is a key metric used by lenders to assess risk, with lower LTVs (under 80%) often leading to better loan terms and higher approval chances.
• Learn how to calculate and apply LTV and CLTV. The LTV ratio is calculated by dividing the loan amount by the asset's appraised value, while the combined loan-to-value (CLTV) ratio includes all loans against the property to assess total borrowing risk.
• Improve your LTV ratio to secure better loans. Making larger down payments, paying off debts, and improving credit scores are effective strategies to lower LTV and increase financial flexibility.

At Lotly, we understand the importance of balancing all the factors of your financial situation to ensure you get the most favorable loan terms. That's why we offer customized support and work with a network of 50+ lenders nationwide to find home equity loans and lines of credit for your unique profile. Contact us today to learn more!

Frequently Asked Questions

What is the recommended loan-to-value ratio?

The recommended loan-to-value (LTV) ratio varies depending on the type of loan and lender. Generally, a lower LTV ratio is preferred as it means that you have more equity in the property and are borrowing less money.

What is the maximum LTV ratio?

The maximum LTV ratio typically ranges from 80-95%, with some lenders allowing up to 100%. However, a higher LTV ratio can result in higher interest rates and stricter borrowing terms.

What is the DTI ratio?

The debt-to-income (DTI) ratio is a financial metric that compares your total monthly debt payments to your gross monthly income. It is used by lenders to assess your ability to manage and repay additional loans. A lower DTI ratio indicates you have more disposable income and are less likely to experience financial strain, making you a more attractive borrower.

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