Real Estate Glossary
What is Loan-to-Value (LTV)? Definition, Formula & Examples
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Definition
Loan-to-value (LTV) ratio is the percentage of a property's value that is financed by a mortgage. It is calculated by dividing the loan amount by the appraised property value. LTV is a primary risk metric for lenders — the higher the LTV, the less equity the borrower has and the more risk the lender carries. Lower LTV ratios typically result in better loan terms and interest rates.
The Loan-to-Value (LTV) Formula
Variables explained:
Loan Amount is the total mortgage balance (or the amount you are borrowing). Appraised Property Value is the lesser of the purchase price or the appraiser's formal valuation. Lenders use the appraised value, not your perception of what the property is worth.
Loan-to-Value (LTV) Example with Real Numbers
You buy a $400,000 property with a 25% down payment ($100,000). Loan amount = $300,000. LTV = ($300,000 / $400,000) × 100 = 75%. This is a standard LTV for investment properties. If the property appraised at only $380,000, your LTV becomes $300,000 / $380,000 = 78.9%, which may affect your loan terms.
Why Loan-to-Value (LTV) Matters for Investors
LTV directly affects your interest rate, whether you need mortgage insurance, and how much cash you'll need at closing. Investment property lenders typically max out at 75–80% LTV, requiring 20–25% down. DSCR lenders may lend up to 80% LTV on strong deals. A lower LTV also means more equity cushion if property values fall, reducing risk for both you and the lender.
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Frequently Asked Questions
What is the maximum LTV for investment properties?
Most conventional lenders max out at 75–80% LTV for single-family investment properties, requiring 20–25% down. For 2–4 unit properties, 75% LTV (25% down) is common. Hard money lenders may go up to 80–90% of cost (not value).
How does LTV affect my interest rate?
Higher LTV = higher rate. Lenders charge a risk premium for higher leverage. Going from 80% to 75% LTV can reduce your rate by 0.125–0.375%, saving thousands over the loan life.
What is combined LTV (CLTV)?
CLTV includes all loans against the property — first mortgage plus any HELOCs or second mortgages. If your first mortgage is 70% LTV and you have a HELOC at 10% LTV, your CLTV is 80%. Lenders cap CLTV on investment properties, usually at 80–85%.
How does LTV relate to equity?
LTV and equity are complements: Equity % = 100% − LTV%. A 75% LTV means you have 25% equity. As you pay down the loan and the property appreciates, LTV falls and equity grows.
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