Loan To Value (LTV)
What Does It Mean?
Loan-To-Value (LTV) is a simple ratio used to show the lender's loan amount compared to the value of your property. LTV is one of the methods used by both conventional and private lenders to determine a loan’s perceived risk. A lower LTV indicates that you, as the borrower, have more protective equity in the property to secure the loan.
How Is LTV Calculated?
As an example, consider a property estimated to be worth $100,000. A lender that requires a 70 percent LTV would loan you $70,000 on that property.
$70,000 / $100,000 = 70%
How Does It Affect My Hard Money Loan?
Your LTV will typically affect your loan application in two ways - first, your lender will use maximum LTV guidelines to determine how much money you will be allowed to borrow. Understanding your lender's maximum LTV guidelines will give you a better understanding of how much leverage you will be able to obtain when considering a project. Secondly, loans with higher LTVs may cost more, both in interest rate and origination points. Loans with higher LTVs are typically riskier transactions for your lender, so your lender may require higher returns in exchange for this risk.