Loan-to-Value Ratio (LTV)

What Is Loan-to-Value Ratio?

Loan-to-Value ratio, commonly abbreviated as LTV, expresses the size of a mortgage loan as a percentage of the property's appraised value or purchase price, whichever is lower. LTV is one of the first numbers lenders look at when evaluating a loan application because it directly measures how much skin the borrower has in the deal. The formula is simple: divide the loan amount by the property value and multiply by 100.

How LTV Is Calculated

If you purchase an investment property appraised at $300,000 and borrow $225,000, your LTV is 75%. The remaining 25% represents your equity, which comes from your down payment. In a refinance scenario, LTV is calculated using the current appraised value rather than the original purchase price. This distinction matters enormously in the BRRRR strategy, where forced appreciation through renovations can dramatically change your LTV position.

Typical LTV Requirements for Investment Properties

Investment property loans carry stricter LTV limits than primary residence loans. Conventional lenders typically allow 75% to 80% LTV on single-family investment properties, meaning you need 20% to 25% down. Multi-family properties of 2 to 4 units often require 25% down. DSCR loans commonly cap at 75% to 80% LTV. Hard money lenders may go to 70% to 75% of the after-repair value. FHA loans on owner-occupied properties allow up to 96.5% LTV, which is why house hacking is such a powerful entry strategy.

Why Lower LTV Gets You Better Terms

Lower LTV means less risk for the lender. If a borrower defaults, the lender needs to recover their money through foreclosure and sale. A property with 75% LTV gives the lender a 25% equity cushion. As a result, lower LTV loans earn better interest rates, lower fees, and more flexible terms. The difference between 80% LTV and 70% LTV on a DSCR loan can easily be half a percentage point in rate, which translates to thousands over the life of the loan.

LTV and Down Payment Relationship

LTV and down payment are two sides of the same coin. An 80% LTV requires a 20% down payment. A 75% LTV requires 25% down. When comparing loan programs, always translate LTV into actual cash required. On a $400,000 property, the difference between 75% LTV and 80% LTV is $20,000 in additional capital. Weigh that against the interest rate savings and decide which deployment of capital generates the best return across your entire portfolio.

Strategic LTV Considerations for Investors

Experienced investors think about LTV dynamically, not just at purchase. Your LTV changes as property values shift and as you pay down principal. In appreciating markets, your LTV drops naturally, building equity you can access through cash-out refinancing. When analyzing deals, model your LTV at purchase, at the refinance point if doing BRRRR, and at your projected exit. Keep combined LTV across your portfolio at a level where a market correction will not put you underwater on multiple properties simultaneously.