What is Loan-to-Value (LTV) Ratio: How to Calculate & LTV Formula 12/5/19, 3)12 AM

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What is Loan-to-Value (LTV) Ratio: How

to Calculate & LTV Formula
By Benilyn Formoso - Suralta on October 18, 2017 | Calculators, Tools, & Templates, Glossary, Real Estate
Investing | Comments (0)

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.

Loan-to-Value (LTV) Formula

Calculating the loan-to-value ratio is relatively simple. We’ll walk you through the
formula and go over each component below.

The loan-to-value (LTV) formula is:

LTV = (Size of Loan) / (Property’s Appraised Value)

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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What is Loan-to-Value (LTV) Ratio: How to Calculate & LTV Formula 12/5/19, 3)12 AM

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.

Property’s Appraised Value

The property’s appraised value is the valuation given by professional appraisers on your
property. It does not necessarily equal the purchase price but is rather the estimated
market value. Usually, appraisers consider several factors when appraising the
property, including the property’s location, condition, and more.

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.

Why the Loan-to-Value Ratio Is Important

The loan-to-value ratio is important because it helps a borrower set his or her
maximum budget, expected down payment, as well as estimate the size of the monthly
payments. Typically, lenders set maximum LTV as well as cap total loan amounts, which
means that you’ll have to either find a property that fits within these limits or expect to
invest a higher 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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What is Loan-to-Value (LTV) Ratio: How to Calculate & LTV Formula 12/5/19, 3)12 AM

Because of this, LTV is also an important consideration when it comes to refinancing a

property and tapping into owner’s equity. With a lower loan-to-value ratio, you
essentially put more money down and borrow less when you first purchase the
property. This mean you have more home equity to start, which gives you refinancing
options like home equity loans (HEL) and home equity lines of credit (HELOC) o" the
bat.

Pros and Cons of a High Loan-to-Value

Ratio
LTV is a common measurement that most lenders use when determining the size of a
loan. There are other ways in determining a loan size, such as the use of loan-to-cost
ratio and after-repair-value ratio. A higher loan-to-value ratio means a higher loan size,
and it has its pros and cons:

Benefits of a High LTV

A high LTV means borrowers don’t need to invest a large down payment
With a high LTV, borrowers can cover costs like new furniture or home
improvements.
A higher LTV gives borrowers more cash to invest elsewhere

Drawbacks of a High LTV

A loan-to-value ratio means higher monthly mortgage payments
Interest rates are also higher because you borrower more and the loan is riskier for
lenders
Property mortgage insurance is often required with a high LTV, and this is an
additional cost

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How to Increase LTV

Although a lower LTV means lower monthly payment obligations, there are some
borrowers who prefer or need a higher LTV. This is because a higher LTV means less
out-of-pocket cost. While the maximum loan-to-value ratios are set by the lender, there
are still ways a borrower can increase the maximum LTV they can qualify for.

Below are 3 ways to increase your loan-to-value ratio:

1. Increase Borrower Qualifications

One of the biggest factors that can a"ect the loan-to-value ratio is your personal
qualifications as a borrower. Typically, more qualified borrowers tend to get approved
for a higher LTV. If you want to increase your LTV, you should focus on increasing things
like your credit score, debt service coverage ratio (DSCR), liquidity, business experience
for fix-and-flips and buy-and-rents, and more.

2. Look for Different Loan Options

There are di"erent loan options that o"er a higher loan-to-value, such as SBA loans,
hard money loans, portfolio loans, and more. If your lender cannot provide you with the
LTV ratio you need, it is best to shop around for other lenders that o"er loans with
higher loan-to-value ratios.

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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3. Consider Different Types of Properties

If the property that you are purchasing cannot qualify for a higher LTV, you may want to
consider other types of properties that can be financed with a high loan-to-value ratio.
For instance, apartment loans and multifamily loans might have a lower maximum LTV,
while loans that finance single-unit, owner-occupied properties (like FHA loans) have a
higher maximum LTV.

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.

Reasons to Lower the LTV Ratio

A low loan-to-value (LTV) ratio isn’t bad. In fact, a lower LTV means you borrow less,
making your monthly payments lower. Also, some lenders provide lower interest rates if
the LTV is lower, which means that you’ll pay less in overall interest, too. It can be a
good idea to get a lower LTV and put a higher down payment on the house if you have
the cash or means to do so.

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.

About the Author

Benilyn Formoso - Suralta

Benilyn Formoso-Suralta is a sta" writer at Fit Small Business

focusing on finance, accounting, and Small Business Loans. She
brings with her 12 years of experience as a banking o!cer with the
Bank of the Philippine Islands with expertise in consumer banking,
real estate sales, and foreign exchanges.

@benilynformoso
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