Loan-to-Value Defined & Clarified

Loan-to-value (LTV) is the key factor which determines if a private lender will consider funding a loan secured by investment real estate. Many people use the term incorrectly, which causes confusion and leads to a lot of time wasted when you’re seeking private financing. In this guide, we’ll (1) clarify the term “loan-to-value” with various loan scenarios, (2) provide the typical loan-to-value for various deal types, and (3) give you our suggestions for the proper terminology you should use when you’re requesting a loan from private lending companies, which are also known as bridge lenders or hard money lenders.

The maximum loan-to-value (LTV) is one of the most important guidelines to look for when seeking a private mortgage, especially when you want the highest possible leverage. It determines how much equity the borrower needs to have in order to qualify for the loan.

The confusion with the term sometimes comes from the lender advertising their max LTV, but if you’re the one seeking financing, it’s on you to be clear about the requested loan amount and loan-to-value. In many cases, the lender will ask you what the loan-to-value is, and the key to avoiding any confusion is to be specific. We recommend that you only use the term “loan-to-value” when referring to the as-is value. There are other terms that you can use to be specific for various deal types, including a purchase, junior lien, rehab, value-add, and ground-up construction. 

Property Purchase Loans

Let’s start with a purchase transaction. When you’re requesting a loan to acquire real estate that does not include any rehab or value-add, don’t even use the term loan-to-value. Be more specific by using the term “loan-to-purchase price” or LTP for short. Most lenders won’t care if you feel you’re purchasing below market value. They’ll consider the purchase price as the value. 

Property Rehab & Value-Add Loans

The deal type which causes the most confusion is a property rehab. Many real estate investors use the term loan-to-value when referring to the value after the rehab is complete. To avoid any confusion, use the term “loan-to-after-repair value” or LTARV for short. There are two other leverage ratios involved in rehab deals: loan-to-cost and loan-to-purchase price. The loan-to-cost, or LTC for short, is the amount of the rehab costs that the lender will fund. We already covered loan-to-purchase, but if the property has already been purchased prior to seeking a rehab loan, then use the term LTV to state the property’s as-is value.

In commercial real estate finance, rehab projects are commonly referred to as “value-add” deals, but the added value may not include any renovations. It could just be leasing some vacant spaces which increases the value of the property. If this applies to your deal, use the term “LTV after lease-up” to state the future value.

Ground-Up Construction Loans

Ground-up construction loans have a similar terminology to rehab loans, but instead of after-repair value, use the term “loan-to-completed value” or LTCV for short. The loan-to-purchase price is for the land acquisition and LTC is for the construction budget. Use the term loan-to-value only for the land value, if the land is already owned prior to seeking a construction loan.

Property Refinance Loans

The cleanest use of term loan-to-value is when the loan request is for a first mortgage refinance and there is no rehab or value add involved. It’s implied that your requested loan amount is based on the as-is value. If you’re seeking a second mortgage or third mortgage, use the term “combined” loan-to-value, or CLTV. It’s the amount of the first mortgage balance, plus the second mortgage amount requested, divided by the as-is value. You must include the first mortgage balance. Stating the LTV only with the junior lien amount would be useless to a lender. 

What is the Maximum LTV for Private Lending?

In private lending, the maximum leverage varies by lender and fluctuates based on market conditions, but in general, the majority of lenders max out at 70% loan-to-value. For a standard purchase or refinance, you typically need 30% equity. If your refinance includes any cash out, most lenders are more conservative and max out at 65% LTV. 

Maximum Leverage for Rehab Loans

85% LTP
100% LTC

Maximum Leverage for Ground-up Construction Loans:

50% LTP
75% LTC
65% LTCV

Maximum LTV for DSCR Long-Term Rental Loans
For long-term rental loans, also known as DSCR loans, the max LTV is 75% and it may be lower depending on the DSCR (debt service coverage ratio). 

These are just average numbers. Some lenders are a bit more aggressive, and all lenders will become more conservative when there is uncertainty in the market. This video was produced in June 2022, at a time of major volatility in the private lending space caused by rising interest rates. Many lenders anticipate that property values will decrease through 2023, which means their maximum leverage will be a lot more conservative until the market stabilizes. 

How to Find Out the Maximum LTV for Private Lenders (AKA Hard Money Lenders)

If you use our platform to seek private financing, you’ll find that every lender has a very detailed profile which includes their maximum leverage for various deal types. Most lenders are pretty good about keeping this updated, so use us as a resource to figure out the maximum leverage as the market changes. Our platform offers 2 options to connect with lenders.

Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. You’ll see their maximum leverage close to the top of the Guidelines page. Make contact with each one directly. Send an email, call, or visit their websites.

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Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

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June 23, 2022