What is a loan-to-value ratio and how does it work?

When you're applying for a loan, whether it's auto financing or a mortgage, the numbers matter. One important figure to understand is your loan-to-value ratio, often abbreviated as LTV.

This is the amount you're asking to borrow versus the value of the property, car or other asset you're trying to buy that will serve as collateral for the loan.

The LTV can make a big difference in whether you get approved, the interest rate you're assessed and the fees you pay.

The LTV shows how much money is being borrowed relative to the worth of the collateral — be it a home, automobile or some other asset. It's typically expressed as a percentage: For example, if you're purchasing a home worth $100,000 and your mortgage is $80,000, your LTV is 80%.

The LTV requirement for a mortgage depends on the type of loan and your financial situation. If you're struggling to find a home loan that fits your needs, try a lender that offers a larger variety of loan types. PNC Bank is CNBC Select's best mortgage lender for flexible loan options and offers conventional loans, USDA loans, VA loans, FHA loans and more.

Calculating LTV is pretty straightforward. It's just the current loan balance divided by the value of the asset.

You can change your initial LTV by increasing your down payment or negotiating a lower purchase price. Over time, your LTV will drop as you pay off your loan. In the case of a house, the figure may shift as the property (hopefully) increases in value.

LTV vs. CLTV

If you're taking out a second mortgage, the lender will look at the combined loan-to-value ratio (CLTV). The CLTV uses a similar formula as LTV, but factors in the balances of multiple loans.

A common situation where CLTV matters is when you're getting a home equity loan or a home equity line of credit (HELOC). For these types of loans, you're typically allowed to have a CLTV of up to 80%.

If you're looking to cash out some of your home's equity to pay for a renovation, calculating your CLTV helps you figure out your rehab budget.

Applicants can typically borrow up to 80% CLTV. If your home is worth $350,000, that means you can borrow up to $280,000 in total. If your current mortgage balance is $200,000, you could finance $80,000 in home upgrades.

The LTV requirements for a mortgage vary depending on the loan type. Mortgages with smaller down payment requirements, for example, allow for higher LTVs. An FHA loan allows down payments of as little as 3.5% or an LTV of 96.5%. And USDA or VA loans can have an LTV of 100% (essentially requiring no down payment).

Conventional loans usually have stricter LTV guidelines, although certain conventional loan programs allow for an LTV as high as 97%. Just remember that with conventional loans, you'll be required to pay private mortgage insurance (PMI) if your LTV is 80% or higher.

Aside from helping you qualify for a mortgage, a lower LTV can get you a better interest rate, although other factors such as your credit score, the type of loan and the loan balance also play a role.

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