Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is LTV in Real Estate.
The loan-to-value (LTV) ratio is a commonly used term in real estate. In this episode, Charles discusses what loan-to-value is and how it impacts the mortgage lending process.
Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is LTV in real estate.
Charles:
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Charles:
When applying for a real estate loan, there are three main numbers that lenders depend upon. What is the value or cost of the property, how much the borrower is putting down as equity, and how much capital the borrower requires to close on the property? So what is the loan value ratio? The loan value ratio, or LTV for short is a key measure used by lenders. It is the relationship between the loan amount and the value of the property expressed as a percentage. In a situation where a property is being purchased for $400,000 and the borrower is putting down 100,000, the loan amount would be $300,000 and the loan value would be 75%. They’ll lower the loan of value, they’ll lower the risk for both the lender and the borrower. Lenders will usually become increasingly more competitive with their terms rates and possibly underwriting as the loan of value decreases. For example, there are lenders today that will finance properties without income verification.
Charles:
No dock loans if the borrower puts down 20 to 30% plus on the property and pays a higher interest rate. Now, this differs widely from traditional home mortgage lenders that might require only a 3% down payment through a government program or five to 20% down For conventional loan. It is common for home loans on properties where the borrower does not put down 20% to require mortgage insurance. Now, this is because there is a high loan of value. If the borrower puts down 20%, the mortgage insurance is usually not a requirement anymore since the loan is less risky to lender. Now, traditionally in commercial real estate, the loan of value utilizes the appraised value of the property or the purchase price, whichever is lower. Loan to value is one of the factors that lenders are considering. But there are other underwriting considerations that are present with commercial real estate, including dscr R or debt service, cover ratio, interest rate, loan terms, market, property type, et cetera.
Charles:
With home loans, lenders are very concerned, probably most concerned with the borrower’s income. This is typically not a major factor with commercial real estate lending. So what is the maximum loan to value for real estate? Well, for commercial real estate, typically 80% as the highest loan to value. Some lenders may go higher, but many lenders usually will max out around 75%. For home loans, the loan to value can go to a hundred percent. With some government programs, FHA allows a 90% loan, 97% loan of value, and conventional lenders will go, uh, up to 95%. However many borrowers will strive for a 20% down payment and an 80% loan of value to eliminate the need for mortgage insurance. What is the difference between loan of value and loan to cost? Well, LTV is normally used to assess acquisitions of already built properties and refinancing debt on those properties.
Charles:
Loan to cost or LTC is usually used to assess construction loans and projects. Some lenders will loan on loan to value or after repair value, but most lenders will utilize the value by what actually cost is or what the value of the property is. Whatever is lower. If you’re purchasing a property for 1 million and the lender will lend up to 70% loan of value and the appraisal comes back at 1.1 million, many lenders will just lend up to that 1 million purchase price. Different loan to values for different properties. So many lenders will have different programs and criteria for different classes of real estate and properties. Uh, a lender may offer lending at 80% loan to value on a nice class a property, while it might only offer 65% loan to value on a Class C property. Historically, better newer properties have better tenants and are usually more liquid, more ready buyers at every portion of the market cycle.
Charles:
This differs from older properties with a less affluent tenant base. Lenders have realized that they’re able to be more competitive on class A properties since they pose less risk. Now, lower loan of values are safer for the lender and the borrower. For lenders, the risk is obvious. A lower loan of value minimizes the chance of losing their capital if they need to foreclose on the property. Now, debt is a huge factor in real estate when you are an investor as well. Since a lender is normally the party in the transaction that’s putting up most of the money owners will, with too much debt, will find it hard to weather a pullback if some of the tenants stop paying rent and or their other expenses increase. Now, other than buying better properties in better areas, one of the best ways to minimize your risk as a real estate investor is to get long-term fixed debt at a, uh, low loan to value like 60 to 70% loan to value.
Charles:
Many new real estate investors will try to borrow as much as the bank will lend them when starting out. However, experienced more established investors will utilize debt, but at a much lower loan to value. A mentor of mine years back told me that debt is like a gun. You can use it to protect yourself or you can shoot yourself in the foot. It just depends how you use it. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.
Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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