What Is Loan-to-Value (LTV) Ratio
What Is Loan-to-Value (LTV) Ratio
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The loan-to-value (LTV) ratio measures the percentage of a property’s value that’s
being financed with a loan. Lenders typically set maximum LTV rates, which are often
used by investors and homebuyers when budgeting for a project. The maximum LTV
rates available to a borrower are based on the specific loan type, lender, as well as
borrower qualifications.
Size of Loan
The size of the loan represents the amount that you borrow from the lender. Usually,
lenders will set a maximum amount based on several factors such as borrower
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qualifications, the type of loan, and more. The size of the loan will dictate the amount of
a borrower’s down payment and therefore his or her starting equity.
Some lenders calculate the loan-to-value ratio based on the agreed purchase price
instead of the appraised value. For example, if you agree to purchase a property for
$100,000, a lender might o"er you a 70% LTV ratio, meaning the loan size would be
$70,000. The 30% (or $30,000) di"erence between the purchase price and loan amount
would be your down payment.
A higher loan-to-value ratio means the lender is financing a larger portion of the
property and is taking on more risk. A lower LTV means less of the property is being
financed. Some borrowers want a high LTV because it means less money upfront.
Others prefer a lower LTV since it means smaller financial obligation in terms of principal
and interest payments and more starting equity.
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For example, SBA 7(a) loans typically have an LTV of up to 90%. Hard money loans can
also often have a max loan-to-value ratio of 90%. And that’s not even to mention FHA
loans, which have maximum LTV rates of 97%. If you’re currently looking at more
traditional loans with max 80% LTV rates, you might want to look at some of these other
options.
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What is Loan-to-Value (LTV) Ratio: How to Calculate & LTV Formula 12/5/19, 3)12 AM
In addition, commercial real estate loans are typically financed with a lower LTV ratio. If
you want to have a high loan-to-value ratio, you may want to look into smaller
properties that are residentially zoned instead.
Below are few of the reasons why a lower LTV ratio might be better for you as a
borrower:
Low interest rates – A high loan-to-value ratio is likely to come with a higher
interest rate, considering the risk for lenders. Most lenders, however, will o"er
lower interest rate for lower LTV ratios.
Higher starting equity– As a borrower, you’ll own more of your property o" the
bat, giving you more leverage when it comes to refinancing as well as a greater
opportunity for price appreciation of the asset.
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No private mortgage insurance (PMI) – Usually, a high LTV ratio would require you
to pay for monthly mortgage insurance, which is an added cost for you.
Bottom Line
When financing a property, loan-to-value ratio is often used to determine the size of
loan. A high LTV is advantageous to the borrowers in the sense that they do not need to
invest a large down payment. However, some borrowers prefer a lower LTV because this
makes their interest rates and monthly mortgage payments much lower.
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