Understanding Loan-To-Value (LTV)
What is LTV: Loan To Value Ratio?
An LTV Ratio, or loan-to-value ratio, is a value (expressed as a percentage) that is used quite often in commercial mortgage finance and multifamily property financing to determine the ratio of a particular debt (like a first mortgage) relative to the value of the collateral (such as a multifamily or other commercial property in this case). So, for example, if a borrower owns a property worth $10 million and is looking to refinance the first mortgage for $8 million, the LTV is 80%.
Lenders utilize this figure to determine their level of risk as well as the borrower leverage in a transaction. The rule is the lower the LTV, the lower the risk. This formula is used primarily in the case of standard acquisitions and refinances. In the cases of multifamily property rehabilitation or ground-up construction, other factors like LTC (loan-to-cost) become more important factors.
LTV Calculator
The Formula for LTV (Loan to Value Ratio) is:
LTV = Loan Amount / Total Value
Related Questions
What is Loan-To-Value (LTV) in commercial real estate?
The Loan-To-Value (LTV) ratio is a measure of the relationship between the loan amount and the value of the commercial real estate (collateral). It is used to measure, or determine risk when financing commercial property or making a commercial mortgage. Calculating the LTV is a key component in helping commercial real estate lenders determine both the qualification of a borrower and the proposed terms of the debt being considered.
A lower LTV results in more competitive commercial loan terms and rates, whereas a high LTV results in higher risk, and therefore less advantageous loan terms for the borrower. For example, suppose that a building is worth $10 million and the existing loan is $6 million. That means the LTV is 60%. This would be a lower risk and more competitively priced loan than perhaps an $8 million loan (80% LTV) on the same property.
Leverage constraints vary by property (type and tenancy), underwriting factors (such as DSCR, debt yield, loan terms, market, etc), sponsorship and recourse.
What are the benefits of a high Loan-To-Value (LTV) ratio?
The benefits of a high Loan-To-Value (LTV) ratio are that investors and developers can get a sizable loan with less cash down. This means that the borrower will have to put less money down and can therefore use their capital for other investments. According to HUD 221(d)(4) Loans, a higher LTV allowance means that investors and developers can get a sizable loan with less cash down. According to LTV Calculator, a lower LTV ratio means that the borrower will have to put less money down and can therefore use their capital for other investments. According to HUD 223(f) Financing, a higher LTV ratio means that the borrower will have to put more money down and may not have capital for other investments.
What are the risks of a high Loan-To-Value (LTV) ratio?
The risks of a high Loan-To-Value (LTV) ratio are that lenders consider it to be riskier and may charge a higher interest rate or provide a smaller loan amount. Additionally, borrowers with a higher LTV ratio will have to put more money down and may not have capital for other investments. (Source 1, Source 2, Source 3)
What are the most common Loan-To-Value (LTV) ratios for commercial real estate loans?
The most common Loan-To-Value (LTV) ratios for commercial real estate loans are typically between 65-80%. This range can vary depending on the type of property, the loan terms, the market, and other factors. For example, a lower LTV results in more competitive commercial loan terms and rates, whereas a high LTV results in higher risk, and therefore less advantageous loan terms for the borrower.
For more information, please see Investopedia's article on Loan-To-Value (LTV) and Multifamily.loans' article on Loan-To-Value (LTV).
What factors influence Loan-To-Value (LTV) ratios for commercial real estate loans?
The Loan-To-Value (LTV) ratio is a measure of the relationship between the loan amount and the value of the commercial real estate (collateral). It is used to measure, or determine risk when financing commercial property or making a commercial mortgage. Factors that influence LTV ratios include property type, property class, location, sponsorship, DSCR (debt service coverage ratio), loan terms, market, etc, sponsorship and recourse. A lower LTV results in more competitive commercial loan terms and rates, whereas a high LTV results in higher risk, and therefore less advantageous loan terms for the borrower.