What is a Loan to Value Ratio?

  • What is a loan to value ratio? This is simple enough to understand. The loan to value ratio is the dollar amount of the loan divided by the value of the property. As an example, a $65,000 loan on a property worth $100,000 would be a 65% LTV. Typically lenders will have a property appraised and lend off of the value given in the appraisal.
  • How to work out a loan to value for a hard money loan? As previously mentioned, most lenders will only move forward with an appraisal in hand. However, there are some lenders, including H&O Capital Funding, that rely on their own valuation instead. Depending on the property type, there are a few different ways to determine the value of a property. Some properties in certain areas trade on a per room, per unit or even per Gross SF (square foot) basis. Large apartment buildings of 8 units or more typically are valued using this method. An example would be 70% LTV loan on a 10-unit apartment building using $100,000/unit as the valuation. In this case the loan would be $700,000. Commercial properties (either office or retail) are generally valued using the income approach, wherein the effective net income is divided by a “Cap Rate” or capitalization rate to give you a value. Take, for example, a borrower whose property produces $100,000 in effective net income that is looking to borrow $600,000 from a lender whose LTV limit is 60%. The property must trade at a 10% cap rate or lower for the lender to be able to make the deal. $100,000/10% = $1,000,000.
  • What is the max LTV for most Hard Money Lenders? This varies across the country, but in the NY, NJ and CT tri-state area you typically see maximum LTV of about 75%, and 70% or 65% is more common. This can vary by property type, location, and a number of other factors that impact the risk level assessed for a property.

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