Loan-to-Value Ratio (LTV) is a metric that compares the size of loan to the value of an asset. It is expressed as a percentage and is used 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). 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.

Sources: HUD223A7 Loan Glossary, Apartment Loans

The formula for calculating the loan-to-value ratio is:

LTV = Loan Amount ÷ Total Value of Collateral

So, for example, if the owner of an office asset worth $10 million seeks to refinance the first mortgage on the property for $8 million, the transaction would have an LTV of 80%, as seen below.

LTV = 8,000,000 ÷ 10,000,000 = 80%

You can also use the LTV Calculator to calculate the Loan to Value (LTV). The formula for LTV is:

LTV = Loan Amount ÷ Total Value

The maximum Loan-to-Value Ratio (LTV) for commercial real estate financing varies depending on the property type, underwriting factors, loan terms, market, etc. Generally, 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, if a property is valued at $1 million and a lender restricts its offer to a 70% LTV, you will be unable to get a loan larger than $700,000.

You can use our Loan-to-Value Ratio Calculator to calculate the LTV for your commercial real estate loan.

A lower Loan-to-Value Ratio (LTV) is seen as lower risk and may result in a lower interest rate or a larger loan amount. 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. Additionally, 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.

The risks of a high Loan-to-Value Ratio (LTV) are that lenders consider it to be a riskier loan, and therefore often have higher interest rates. Lenders believe that borrowers who have loans with higher LTVs have a greater likelihood of defaulting on their mortgages due to of the lack of equity in the property. This lack of equity can make it difficult for lenders to recover their losses if the borrower defaults on the loan.

Source: LTV: Loan-to-Value Ratio in Relation to HUD 221(d)(4) Loans and LTV: Loan to Value in Relation to HUD 223f Loans

Loan-to-Value Ratio (LTV) is an important factor that lenders consider when deciding whether to approve a loan. Generally, the higher the LTV, the riskier the loan is for the lender. This is because there is less equity in the property that can be recovered if the borrower defaults. Small business owners may prefer high LTV loans, as they can purchase a property with less money down, freeing up their valuable cash for other investment opportunities.

For more information, please see Loan-to-Value Ratio Calculator and LTV: Loan to Value in Relation to HUD 223f Loans.