Loan-to-value ratio (LTV)

The loan-to-value ratio (LTV) is the percentage of a property’s appraised value that its mortgage covers. It’s used as one indicator of the risk a particular mortgage represents to the lender.

Loan-to-value ratio formula

To calculate LTV, use this equation:

LTV = loan amount ÷ appraised value of the property

The appraised value of the property refers to how much the asset can be sold for. Nearly every serious lender is going to require an appraisal on a property prior to releasing funds as it is a surefire way of determining the asset’s value. 

The Loan amount refers to the amount of debt capital lenders put toward the project.

LTV differs from loan-to-cost ratio (LTC), which takes into account only the project costs, not the full property value.

Using LTV

The higher the LTV, the higher the risk to the lender, so guidelines for mortgage approval tend to become more stringent. The lender, for example, might require the borrower to take out more mortgage insurance. Interest rates, of course, tend to go up as well

LTV isn’t the only measure of risk, though. If a borrower, because of credit history or existing debt obligations, is considered a borderline candidate for a new mortgage, they can improve their application’s chances by requesting less money. For example, rather than asking for a $90,000 loan against a $100,000 property, they can request a $75,000 loan. This lowers the LTV from 90% to 75% and thus improves the odds of acceptance. The practical matter of financing that additional $15,000 might be addressed by taking out a hard money loan.

Real estate values change over time, of course. So it is not unusual for a loan issued at an LTV of 80% or 75% or lower to have a dramatically different LTV years later. As real estate prices in the area increase, the LTV could drop down, providing an opportunity to refinance at a lower rate. On the other hand, real estate values can drop sharply in response to economic factors, as they did in 2008 when the Great Recession took hold. 

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