LTV (Loan-to-Value)

When it comes to hard money lending, LTV is a crucial ratio. This percentage determines how much a hard money lender is willing to loan.

What Is LTV?

LTV, or loan-to-value, is a ratio of the amount of a loan vs the value of the property used to secure it. Read on to learn how this ratio plays into hard money loans.

How Does LTV Relate to Hard Money Loans?

Hard money lenders use LTV to calculate the loan amounts they’re willing to issue. In most cases, lenders have a cap on the LTV they’re willing to loan. Source Capital, for instance, loans up to:

65% LTV for first-position loans: A borrower taking out their first hard money loan on a property can borrow up to 65% of the as-is value of the property.
50% LTV for second-position loans: A borrower seeking a hard money loan on a property with a pre-existing loan can borrow up to 50% of that property’s as-is value.

Generally speaking, the higher a loan’s LTV, the riskier the loan is for the lender. In a worst-case scenario in which a borrower defaults on their loan, the lender is very likely to make back at least 50% of the property’s value by selling it. They’re not as likely to make back 75% or higher. Therefore, higher LTV means higher risk.

How LTV Works

A lender’s LTV is the upper limit of what they’re willing to loan. Let’s break down how to calculate this number.

To calculate LTV, use the following equation:

LTV = (Loan amount / Property value) x 100

For instance, the LTV of a loan of $300,000 on a $500,000 property is calculated as follows:

LTV = ($300,000 / $500,000) x 100
The LTV of this loan is 60%.

You can also use LTV to calculate a projected loan amount using the following formula:

Loan amount = Property Value x LTV

For instance, to determine the loan value on a $500,000 property with an LTV of 60%, do this:

Loan Amount = $500,000 * 0.6
The loan would be $300,000.

Real‑World Scenarios

Use these real-world scenarios to get a better understanding of LTV.

Fix and Flip

An investor discovers a fix-and-flip commercial property they’d like to purchase using a hard money loan. Before they approach a hard money lender, they want to do their due diligence and determine whether they could reasonably renovate the property with a hard money loan. They know they need at least $500,000 to complete renovations.

The investor knows their hard money lender offers 65% LTV on first-position loans, and that the value of their collateral property is $600,000. To calculate their projected loan amount, they use the above formula. They determine that the max loan they could get using their existing property as collateral is $325,000, which isn’t enough to complete the necessary renovations, so they pass on the property.

Retail Space

A commercial property buyer approaches a hard money lender looking for a second-position loan on their existing multi-family property, worth $1 million so they can purchase new retail space. The hard money lender knows they can offer 50% LTV on a second-position loan. Using this figure, the hard money lender calculates the commercial property buyer’s max loan amount, which is $500,000.

LTV FAQs

How does LTV affect the interest rate on a hard money loan?

Generally speaking, hard money loans with higher LTVs will have higher interest rates. These loans tend to be higher risk for lenders. The higher a loan’s LTV, the greater risk that a lender may not be able to recoup their losses if the borrower defaults on their loan.

What is the difference between LTV for a hard money loan and a traditional mortgage?

In hard money lending, LTV represents the ratio between the loan amount and the value of the property used to secure it. In traditional mortgages, on the other hand, LTV generally compares the loan amount vs. the value of the property the borrower is purchasing. For instance, a traditional mortgage with an LTV of 80% means the borrower puts down a 20% down payment and is borrowing the remaining 80% for the purchase.

Will a higher LTV reduce my chances of getting approved for a hard money loan?

Higher LTV doesn’t necessarily mean that you have a lower chance of getting approved for your hard money loan. Lenders look at a number of factors to determine your ability to pay back a hard money loan, not just LTV. For instance, a higher LTV loan with longer terms may have just as good a chance of approval as a low LTV loan with shorter terms.

How can I lower my LTV to get better terms on a hard money loan?

If you want a better interest rate, shorter loan terms, a lower loan origination fee, or other changes to your loan terms, it can help to lower your LTV. To do so you can:

Borrow less: In the simplest terms, lowering your loan amount can lower your LTV and boost your loan terms.
Increase your property’s value: You can also do renovations to boost your property’s value before applying for your loan. That way, your loan will be a smaller portion of your property’s total value.

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