The formula and why lenders use it
LTV is calculated by dividing the loan balance by the property value and expressing the result as a percentage. Equity is the property value minus the loan balance, and equity percentage is simply 100% minus the LTV. Fannie Mae and other conforming-loan guidelines use LTV as a core underwriting measure because it directly reflects how much equity cushion exists between the loan balance and the property's value — a lower LTV means more equity and generally less risk to the lender.
- LTV = (loan balance ÷ property value) × 100
- Equity ($) = property value − loan balance
- Equity (%) = 100 − LTV
Worked example
A $320,000 loan balance on a property valued at $400,000 produces an LTV of 80% ($320,000 ÷ $400,000), equity of $80,000, and an equity percentage of 20%.
| LTV | Classification | Typical lending context |
|---|---|---|
| 80% or below | Low | At or below the common conventional PMI threshold |
| 80.01% – 95% | Standard | Above the PMI threshold; commonly requires mortgage insurance |
| Above 95% | High | Near or above typical maximum LTV limits for many conventional programs |
Why 80% specifically
The 80% LTV level is a widely referenced threshold on conventional mortgages because it is the point below which private mortgage insurance (PMI) is typically not required, reflecting a large-enough equity cushion that lenders are willing to bear the risk without extra insurance. Above 80% LTV, PMI is commonly required until the balance is paid down or the property appreciates back below the threshold. Different loan programs and lenders may apply different specific thresholds and rules, but 80% remains the most commonly cited reference point.
PMI does not cancel automatically the moment LTV crosses below 80% on most loans — most lenders require a formal request or a new appraisal to remove it, per servicer and investor rules, which is one of the most common points of confusion for borrowers tracking their own LTV over time.
LTV vs. combined LTV (CLTV)
LTV compares a single loan balance to the property value. Combined loan-to-value (CLTV) instead adds together the balances of all loans secured by the same property — for example, a first mortgage plus a home equity line of credit — and compares that total to the property value. Lenders typically use CLTV, not plain LTV, when underwriting a second lien such as a HELOC or home equity loan, since it captures the total claim against the home rather than just the first mortgage.
Sıkça Sorulan Sorular
What is a good loan-to-value ratio?
An LTV at or below 80% is commonly viewed favorably on conventional mortgages, since it is the widely used threshold below which private mortgage insurance is typically not required. Lower LTV generally reflects a larger equity cushion.
How do I calculate loan-to-value ratio?
Divide the loan balance by the property's value and multiply by 100. A $320,000 loan on a $400,000 property gives an LTV of 80% ($320,000 ÷ $400,000 × 100), leaving 20% equity.
What is the difference between LTV and CLTV?
LTV compares a single loan balance to the property value. Combined loan-to-value (CLTV) adds together all loans secured by the same property — such as a first mortgage plus a HELOC — and compares that total to the property value.
Does PMI cancel automatically once LTV drops below 80%?
Not usually. Most lenders require a formal request or a new appraisal to remove PMI once LTV crosses below 80%, per servicer and investor rules — it typically isn't removed automatically just because the balance has paid down.
Kaynaklar
- Consumer Financial Protection Bureau (CFPB) — What is a loan-to-value ratio? https://www.consumerfinance.gov/
- Consumer Financial Protection Bureau (CFPB) — What is private mortgage insurance (PMI)? https://www.consumerfinance.gov/
- Fannie Mae. Selling Guide — B2-1.5: Loan-to-Value (LTV) ratios. https://www.fanniemae.com/