Loan-to-value ratio (LTV)

Loan-to-value ratio is the loan amount divided by the home's value, expressed as a percentage. A buyer purchasing a $400,000 home with $80,000 down has a $320,000 loan and an 80% LTV. The same buyer with $40,000 down has a 90% LTV, and a different mortgage product as a result.

How it works: lenders use LTV to size the risk of a loan. Higher LTV means less borrower equity, which means more lender exposure if the loan defaults. Underwriting standards, rate pricing, and mortgage insurance requirements all key off LTV bands. On conventional loans, PMI is required above 80% LTV at origination and auto-cancels at 78% LTV on the original schedule. On FHA loans, the LTV at origination determines whether MIP stays for the life of the loan (above 90% LTV) or drops off after 11 years (90% LTV or below).

Why it matters: small differences in LTV can produce meaningful differences in monthly cost. A loan at 80.01% LTV requires PMI; the same loan at 79.99% doesn't. The threshold structure means slightly increasing the down payment to clear an LTV band sometimes pays off across the life of the loan.

Common gotcha: LTV at origination uses the lesser of purchase price or appraised value. A home that appraises below the contract price means the LTV calculation uses the appraised value as the denominator, which can push the LTV higher than the buyer expected and trigger different product requirements.