What is LTV and Why it Matters Hard Money Lending

What is LTV and Why it Matters is an important aspect of all lending decisions.

WHAT IS (LTV)? Hard Money Lending

Loan-to Value Ratio (LTV): a comparison between the value of your loan amount and the estimated value of your property. To determine a loan’s loan-to-value, the lender will take your desire loan amount and divide it by the value of your commercial real estate .  Hard money lenders sometimes require two opinions of value to ensure they’re making a good financial decision to fund the loan. Lenders can get their values from appraisals, broker’s price opinions (BPO) or tax appraisal value.

The loan-to-value ratio or LTV is key in real estate. LTV links the mortgage amount to the home’s value. Banks use LTV to judge lending risk. It is found by dividing the mortgage by the lower of the sale price or appraised value. For instance, a $200,000 mortgage on a home valued at $250,000 yields an 80% LTV. A lower LTV often means better loan terms. This is because it shows less risk for the lender.

WHY IT MATTERS?

 LTV is a risk assessment tool. Failure of the borrower to repay a mortgage is the driving risk factor behind all decisions made by a lender.  LTV is one of key aspects that lenders keep in mind when approving loans. Hard money lenders, who assume a riskier position in the loans, usually have a max LTV. Most hard money loans are never based on credit score, but instead are based on the value of the commercial real estate.

The more desirable the commercial real estate is, the more comfortable the lender is funding the loan. The LTV percent is determined by lenders when evaluating risk factors.

Some of the factors but not all are based on examples below.

• Property condition:

  • A well-maintained property with “curb appeal” that needs no improvements or rehabbing will obviously be more desirable and marketable than one needing repairs and in poor condition. Surrounding properties in below average condition will result in a neighborhood “eye sore” and decrease sale opportunities and ultimately result in a low LTV.

• Demographics:

  • A cities demographics graph and group basic information of the people living in the city, for example age, annual income, gender, race, etc. The types of people, age brackets, stage of life, family structure, education level, and employment and occupations in an area affect the type of property in demand, which can ultimately add or decrease property value.

• Foreclosure rate:

  • The risk level is high when lending on commercial real estate in an area that is surrounded by properties that are for sale due to foreclosure. Frequent foreclosures in an area throws up a red flag to the lender that this mortgage could also go into default. Also, the chances of the lender being able to sell a property and getting back what they put in are slim when similar properties are for sale due to foreclosure listed at a cheaper price. Properties located in a high foreclosure area will usually be approved at a lower LTV.

• Use of funds:

  • Giving your lender solid proof of where the money goes could mean a better loan-to-value ratio. Lenders need to know how you plan to use the funds. For instance, show contracts for home upgrades. Share invoices for business gear. Without proof, lenders see more risk. They cannot fully trust where their money goes. Title documents prove ownership and reveal current mortgages. They also show outstanding liens. Liens are claims against the property for unpaid debts. Without this info, lenders lack full confidence. Lenders must gauge risk. Loan-to-value ratio is tied to risk. A lower LTV means the borrower has more skin in the game. This lowers the lender’s risk. At its core, LTV depends on how safe the lender feels.

Submit your loan application here or call us to speak directly with a First Financial Depot account executive with over 40 years of experience in Hard Money Lending.

Call: (855) 505-5363