Loan-to-value (LTV) is the size of your mortgage compared with the value of the home, written as a percentage. A $300,000 loan on a $320,000 home is an LTV of 93.75%, which means you own the other 6.25% from day one.
The formula is the loan amount divided by the value. On a purchase, the value is the lower of the contract price or the appraised value. Fannie Mae also rounds the result: it cuts the figure to two decimal places, then rounds up to the next whole percent, so 95.01% counts as 96%.
The highest LTV each program allows
| Program | Highest LTV on a purchase |
|---|---|
| FHA, 580 score and up | 96.5% |
| FHA, 500 to 579 score | 90% |
| Conventional, single-family, first-time buyer programs | 97% |
| Conventional, 2 to 4 units | 95% |
| VA, eligible borrower with full entitlement | 100% |
| USDA, eligible rural area | 100% |
FHA measures LTV on the base loan, before the 1.75% upfront mortgage insurance premium is added, and VA does the same with its funding fee.
How LTV changes your monthly cost
On a Conventional loan, private mortgage insurance (PMI, the monthly premium that protects the lender when you put down less than 20%) applies above 80% LTV. It isn't permanent. You can ask the servicer to drop it once the balance reaches 80% of the original value, on schedule or sooner with extra payments, and it falls off automatically when the scheduled balance hits 78%.
FHA prices its annual mortgage insurance premium by LTV too: 0.55% a year above 95% LTV, and 0.50% at or below 95% on most 30-year loans. When an FHA loan starts above 90% LTV, the annual premium stays for the life of the loan. At 90% or below, it ends after 11 years.
VA loans carry no monthly mortgage insurance at any LTV, only a one-time funding fee. USDA charges the same 0.35% annual fee whatever the LTV.
A worked example with a low appraisal
A first-time buyer signs a contract at $350,000 on a single-family home and plans a Conventional loan with 5% down.
- Planned down payment: 5% of $350,000 = $17,500
- Planned loan: $350,000 minus $17,500 = $332,500
- Planned LTV: $332,500 divided by $350,000 = 95%
The appraisal comes back at $340,000. Now the LTV is $332,500 divided by $340,000, or 97.79%, which Fannie Mae rounds up to 98%. That's over the 97% ceiling.
The largest loan allowed is 97% of $340,000, or $329,800. To keep the price at $350,000, the buyer would bring $350,000 minus $329,800, which is $20,200. Asking the seller to come down toward $340,000 shrinks that number fast, and a family gift can cover the rest. PMI on the new loan could be cancelled once the balance is scheduled to hit $272,000, which is 80% of the $340,000 value.
Ways to land at a lower LTV
A larger down payment lowers LTV, and gift funds from a relative count toward it. A price reduction after a low appraisal does the same thing. When the goal is to put down as little as possible instead, FHA 100% financing keeps the first mortgage at 96.5% and covers the 3.5% with a down payment assistance second.
The mortgage payment calculator shows how the payment and mortgage insurance move as you change the down payment. For a loan built around your price and savings, call AAA Capital Funding at 888-601-8344.