Loan to Value Ratio (LTV)
Real Estate Definitions for Real Estate Investing
Loan to Value Ratio (LTV)
The Loan-to-Value Ratio is a real estate financial term used by lenders to compare the amount of a property’s loan to the value of the property, expressed as a ratio.
The loan-to-value is calculated by taking the amount of the loan (mortgage) and dividing it by the fair market value (FMV) of the property. The value of the property is generally determined by an appraiser or sometimes the purchase price. Generally, lesser determined value of the two is used.
By way of example, if a property is worth $100,000 and has a mortgage balance of $60,000, the Loan-to-Value ratio is calculated as 60%. This also means that 40% of the value (100% less 60%) of the property is equity.
Formula:
Loan to Value Ratio (LTV) =
Total Debt / Property Value
The loan-to-value helps a lender determine the risk of the loan by determining how leveraged the property is compared to its value. The higher the Loan-to-Value (LTV) ratio, the riskier the loan is for a lender.
If you have more than one loan against the property, you must add up all outstanding balances to properly calculate the Loan-to-Value ratio.
For example, if your home is worth $100,000 and you have a mortgage balance of $50,000, the Loan-to-Value ratio on your home is, of course, 50%. However, if you also have a second secured loan for $25,000, the Loan-to-Value ratio is actually 75% (($50,000 + $25,000) divided by $100,000).
Loan to value (LTV) is one of the key risk factors that lenders use. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect the lender from the buyer default.
Our real estate investment software calculates the Loan to Value Ratio (LTV) so that you are in a better position of understating how much to offer for a particular property and make the appropriate presentations to bankers, lenders and prospective real estate partners.