LTV: Loan to Value
Calculating loan to value for real estate loans
The loan-to-value ratio (LTV) is a measure of the relationship between the loan amount and the value of the property. It is used to determine risk when financing property or making a commercial loan. LTV is a key component in helping real estate lenders determine both the qualification of a borrower and the proposed loan terms.
A simple way to calculate loan-to-value is: LTV= Loan Amount / Appraised Property Value
80% LTV Mortgage
In this chart the property loan represents 80% of the property value with the owner equity making up the other 20%, thereby totaling 100%.
A lower LTV results in more competitive loan terms and rates, whereas a higher LTV results in greater 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 $7 million. That means the LTV is 70%. This would be a lower risk and more competitively priced loan than an $8 million loan (80% LTV) on the same property.
Leverage constraints vary by property (type and tenancy), underwriting factors (DSCR, debt yield, loan terms, etc), sponsorship and recourse.
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