How LTV Is Calculated — and Why It's Simple
The formula is straightforward: divide the loan amount by the appraised value of the property, then multiply by 100 to get a percentage.
LTV = (Loan Amount ÷ Appraised Value) × 100
If you're buying a home appraised at $300,000 and taking out a $240,000 mortgage, your LTV is 80%. Put down more and the number drops; borrow more relative to the value and it rises. Lenders always use the appraised value — determined by a licensed appraiser — not the sale price if the two differ.
LTV is one of several metrics lenders weigh together. Lenders also evaluate employment history, asset reserves, and income documentation alongside LTV when making underwriting decisions. For a deeper look at another key ratio, see our guide on how your debt-to-income ratio shapes mortgage decisions.
80%
LTV threshold that typically triggers PMI
Conventional lenders generally require private mortgage insurance when a borrower's down payment is less than 20% of the home's appraised value.
78%
LTV at which PMI auto-cancels by law
The Homeowners Protection Act requires automatic PMI cancellation on conventional loans once LTV reaches 78% based on the original amortization schedule.
3%–5%
Minimum down payment on many conventional loans
Fannie Mae and Freddie Mac guidelines allow qualified borrowers to put as little as 3% down, resulting in an initial LTV of 97%.
Why Lenders Use LTV as a Risk Measure
From a lender's perspective, LTV answers a practical question: if the borrower stops making payments, how likely is it that selling the property will cover the outstanding loan balance? A low LTV provides a larger equity cushion — protection against losses if the home must be sold quickly or if values decline.
A borrower who puts 20% down has immediate equity in the property. That stake gives them a financial reason to keep paying and gives the lender a buffer before a foreclosure sale would result in a loss. By contrast, a borrower with only 3% down has very little equity, meaning even a modest dip in home prices could leave the lender exposed.
“Equity is the lender's margin of safety. The more skin in the game a borrower has, the stronger the alignment of interests between the two parties.”
— Urban Institute Housing Finance Policy Center, Research organization focused on housing finance and mortgage markets
LTV isn't evaluated in isolation. Credit scores play a parallel role in mortgage underwriting, and lenders typically look at both together to assess overall risk.
The 80% Threshold and Private Mortgage Insurance
The 80% LTV mark is significant in conventional mortgage lending. Borrow more than 80% of a property's value — meaning a down payment below 20% — and most conventional lenders will require private mortgage insurance (PMI). PMI protects the lender, not the borrower, against default losses. The cost is typically rolled into the monthly mortgage payment.
PMI isn't permanent. Under the Homeowners Protection Act, lenders must automatically cancel PMI on conventional loans when the LTV reaches 78% based on the original amortization schedule and purchase price. Borrowers can also request cancellation at 80% LTV if they meet their lender's requirements, including a good payment history and, in some cases, a new appraisal confirming current value.
For a full explanation of how PMI works and the rules for removing it, see our guide on private mortgage insurance.
Track Your LTV Annually
Request an updated home value estimate each year — either through a formal appraisal or a lender-accepted automated valuation. If your LTV has crossed below 80% due to rising values or principal paydown, you may be able to request PMI removal and reduce your monthly payment. Check with your loan servicer for their specific requirements.
How LTV Changes — and What That Means for You
LTV is not a static number. It shifts as your loan balance decreases through regular payments and as your home's market value changes over time. In a period of rising home values, your LTV may improve even if you haven't paid down much principal, because the appraised value — the denominator — has grown.
This matters most in two situations. First, reaching the 80% LTV threshold can remove your PMI obligation, reducing your monthly costs. Second, a lower LTV strengthens your position when refinancing or applying for a home equity loan or line of credit. Lenders set maximum combined LTV limits for these products, so the more equity you've built, the more flexibility you have.
When reading a formal loan offer, the LTV will appear alongside other figures. Our guide to reading a Loan Estimate explains where these numbers appear and what to look for before signing.
This article is for general informational and educational purposes only and does not constitute personalized financial or mortgage advice. Loan terms, LTV thresholds, and PMI rules vary by lender and loan program. Consult a licensed mortgage professional for guidance specific to your situation.
