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How to Use Loan to Value Ratio (LTV) in Real Estate

Jerry Norton

Aug 8, 2024

aerial view of green trees and white flowers

When you apply for a mortgage to fund your next real estate investment, your lender will look at many factors to determine your ability to pay back the loan. 

These factors include your income, your credit score, any debt you have, the overall condition of the property, and Loan to Value Ratio (LTV). 

Wait, loan to value ratio? 

What’s that?

This is a question many beginner real estate investors have. 

It’s one of many real estate formulas to understand — others including gross rent multiplier, cash on cash return, price to rent ratio, and debt to equity ratio — as you start your investing journey.

In this article, we’ll break down everything you need to know about loan to value ratio, including how you can improve yours so that you get the best loan for your investment. 

What is Loan to Value (LTV) Ratio?

Loan to Value Ratio is a measure of risk for lenders. It helps them assess your ability as a borrower to pay back their loan.  

Because of this, Loan to Value represents the ratio between the loan amount and the appraised value of a given property. It's expressed as a percentage in between 0 and 100%.

The higher the LTV, the greater the risk for the lender. The lower the LTV, the less risk, which is why real estate investors and homeowners alike will aim to have a low percentage.

Loan-to-Value isn’t just a number for lenders, though.

By knowing your LTV, you can aim to reduce it, given that a lower LTV ratio can often result in better loan terms, including lower interest rates and avoiding the need for private mortgage insurance (PMI). 

But that's not all.

LTV also affects the interest rates you are offered. Here's what I mean: lower LTV ratios are associated with lower interest rates, while borrowers with higher LTV ratios may likely face higher interest rates.

This may have you wondering ... how do you calculate LTV?

How to Calculate LTV

To find the Loan to Value Ratio, you simply divide the amount of the loan by the appraised value of the property, then multiply the result by 100 to get the percentage. 

For example, if a property is appraised at $250,000 and the loan amount is $200,000, the LTV ratio would be (200,000 / 250,000) x 100 = 80%.

If your LTV goes above 80%, you may have to purchase Private Mortgage Insurance, which can add anywhere from 0.5% to 1% to the total amount of the loan on annually.

This is why knowing your own LTV is so important.

What is a Good Loan to Value Ratio?

A good rule of thumb is to have an LTV no greater than 80%. 

Because of this, anything above 80 can be seen as a high LTV, and anything lower than 80 will be viewed as a low LTV.

How to Improve Your LTV Ratio

So, once you know your LTV, how can you reduce it? Here's a few simple ways.

Large Downpayment

By making a large downpayment on a property, you can reduce the LTV ratio.

Reduce Your Debt

By diligently paying down outstanding loan balances, such as credit cards or personal loans, you can significantly decrease their overall debt-to-income ratio. This helps lower your LTV ratio, making it more favorable for lenders.

Along with that, paying more than your mortgage requirement, even if it's a hundred dollars, can help you reduce your debt and improve your LTV ratio.

Increase Your Property’s Value

By increasing your property's value through home renovations, remodeling, or other upgrades, you can boost your property's market value, which will improve your LTV ratio.

The Bottom Line: Loan to Value Ratio

By understanding loan to value ratio, you can save yourself money and in the future.

A low LTV — anything below 80% — can put you in the best opportunity to secure funding for your first or next real estate deal.