LTV is a critical factor in mortgage lending decisions. A lower LTV represents less risk for the lender because the borrower has more equity in the property. Conventional loans typically require PMI when LTV exceeds 80% (down payment less than 20%). Lenders use the LOWER of the appraised value or purchase price to calculate LTV. Higher LTV ratios generally result in higher interest rates and additional requirements like mortgage insurance.
A buyer purchases a $400,000 home with a $60,000 down payment, borrowing $340,000. LTV = $340,000 / $400,000 = 85%. Since LTV exceeds 80%, PMI is required on a conventional loan. Once the loan balance drops to $320,000 (80% LTV), the borrower can request PMI removal.
Know the formula: LTV = Loan Amount / Property Value. The key threshold is 80% — above 80% LTV, PMI is required for conventional loans. Remember that lenders use the LOWER of purchase price or appraised value. The exam may give you down payment percentage and ask for LTV (100% minus down payment percentage = LTV).
Related Terms
Related Concepts
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Frequently Asked Questions
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