Loan-to-Value Ratio Basics for Real Estate Investors

As a commercial real estate investor, you've likely heard the phrase “loan-to-value ratio.” You likely also know that this ratio is important to your success in the loan application process. But what exactly is the loan-to-value ratio, and what do you need to know about this sum before entering into a loan agreement? We'll address these questions in this latest post, as we explain more about loan-to-value ratios.

What is the LTV Ratio?

The loan-to-value ratio (LTV) is the amount you're borrowing from the lender as a percentage of the property's value. By taking your mortgage loan balance and dividing it by the appraised value of the property, you can reach your LTV ratio. For example, a person buying a $400,000 home and taking out a $300,000 loan would have a 75% LTV ratio. The most critical consideration in determining the LTV for the loan is your down payment. The higher the down payment, the lower the LTV and the greater the chance of you receiving your ideal loan from the lender.

What’s the Ideal LTV Ratio?

The average down payment in the residential marketplace is 20%, and many lenders expect borrowers to pay at least 20% down if they are paying for a residential property. There is a difference in the commercial real estate marketplace, where loan value is often dependant on the business and its growth in the years ahead. However, lenders will often limit their loans to 75-80% of the value of the commercial property. And so, it's important that you have the down payment capital available to achieve a smaller loan-to-value ratio when approaching lenders.

Approaching Lenders

Now you know a little more about the loan-to-value ratio and what it means in terms of your property purchase options, it's time to consider your direct interactions with lenders.

You should remember that borrowers with a lower LTV ratio are more likely to qualify for affordable financing rates, and so you should take as many steps as possible to minimize your LTV ratio before entering into an agreement with a lender. 

For the lender, your LTV ratio will determine the level of risk they have to take on when choosing you as a borrower, and so you should work closely with your lender to build strategies that limit this risk level. Many lenders will be willing to work with you and help you finance your commercial loan at affordable rates. To discover more about this important real estate investing topic, call us today.