LTV Calculator

Calculating Loan to Value (LTV)

The formula for LTV (the loan to value ratio) is:
⁠LTV = Loan Amount ÷ Total Value

What Is a Loan to Value Ratio?

The LTV ratio is used in apartment mortgage finance and commercial property financing to determine the ratio of a particular debt (like a loan on an apartment property) in relation to the value of the collateral (the property). Lenders use this figure to determine their level of risk and borrower leverage in a transaction. The lower the LTV, the lower the risk as far as lenders are concerned.

This formula is mainly used in the case of standard purchases and refinances. In the cases of multifamily property rehabilitation, or ground-up construction, other metrics like LTC become more useful factors. When LTV is used in the case of a rehab, new construction, or other value-add financing opportunity, it is used as a leverage constraint for the finished, or stabilized value of the property.

How Does LTV Work?

LTV is an important metric for lenders to determine how much debt to provide for a particular property. The ratio is calculated by dividing the loan amount by the appraised value of the property. The appraised value is determined by an independent appraiser and is based on the current condition and market value of the property.

For example, if an apartment building has an appraised value of $1 million and the lender is providing a loan for $700,000, the LTV ratio is 70%. This means that the lender is loaning 70% of the value of the property.

The maximum LTV ratio will depend on the lender and the type of property. Generally, lenders will offer lower ratios for higher-risk properties and higher ratios for lower-risk properties.

Why Is LTV Important?

LTV is important because it allows lenders to assess the risk of a loan and decide how much debt to provide. A lower LTV ratio is seen as lower risk and may result in a lower interest rate or a larger loan amount. A higher LTV ratio is seen as higher risk and may result in a higher interest rate or a smaller loan amount.

LTV is also important for borrowers. A lower LTV ratio means that the borrower will have to put less money down and can therefore use their capital for other investments. A higher LTV ratio means that the borrower will have to put more money down and may not have capital for other investments.

What to do if an LTV is Too High?

If an LTV is too high, borrowers have a few options. One option is to increase the amount of cash put down as a down payment in order to lower the LTV. This can be done by either reducing the loan amount or increasing the appraised value of the property.

Another option is to look for a lender that is willing to provide a loan with a higher LTV. This will depend on the type of property, the lender's credit policy, and the borrower's creditworthiness.

Finally, borrowers can look for alternative financing solutions such as private financing or government-backed loans that may provide better terms.

Conclusion

LTV is an important metric for lenders to assess the risk of a loan and determine how much debt to provide. It is also important for borrowers as it determines the amount of cash they need to put down. If an LTV is too high, borrowers have options to reduce it such as increasing the down payment, finding a lender with more flexibility, or looking for alternative financing solutions.