What is loan-to-value? The loan divided by the value of the property, using the lower of the purchase price and the appraised value; it sets mortgage insurance, eligibility and often the rate.
Loan-to-value is one division: the loan amount over the property's value, as a percentage. On a purchase the value in the denominator is the lower of the contract price and the appraised value, which is why an appraisal below the price raises the ratio rather than lowering the price. Combined loan-to-value, or CLTV, does the same sum with every lien against the property in the numerator, so a second mortgage or a home equity line counts even though the first lender is not the one lending it.
The number matters because programs are written in terms of it. Above 80 percent on a conventional loan, mortgage insurance is normally required, and 80 percent is also the point at which a borrower may request cancellation under the Homeowners Protection Act. Standard conventional programs run to 95 percent, and the agencies' low down payment programs to 97 percent. FHA goes to 96.5 percent with a qualifying score, and a VA loan can be written at 100 percent with no down payment. Between those lines, most rate sheets price in LTV bands, so crossing one in either direction changes the rate as well as the insurance.
For a buyer here the practical version is that the ratio is not fixed until the appraisal is in. A $400,000 purchase with $80,000 down is 80 percent on paper; if the appraiser writes $385,000 the loan of $320,000 is now 83.1 percent of value, and the choices are more cash, a smaller loan, a renegotiated price or mortgage insurance. For an owner the same sum runs the other way as the balance amortizes and values move, which is what a request to cancel mortgage insurance is arguing about.
A worked example
A $400,000 purchase with $80,000 down is a $320,000 loan at 80 percent LTV, the line at which conventional mortgage insurance stops being required. The same buyer putting 5 percent down borrows $380,000 at 95 percent. Add a $40,000 second lien to the 80 percent loan and the combined ratio is 90 percent. If the appraisal comes in at $385,000, the $320,000 loan is measured against $385,000 instead and the ratio is 83.1 percent.
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Questions people ask
Is loan-to-value based on the purchase price or the appraisal?
On a purchase, the lower of the two. A high appraisal does not reduce the ratio, because the price still governs; a low one raises it, because the appraised value becomes the denominator.
What loan-to-value do you need to avoid PMI?
80 percent or lower on a conventional loan, which is 20 percent down on a purchase. Below that threshold the agencies do not require mortgage insurance, and reaching it later by paying down or by appreciation is the basis of a cancellation request.