# Loan to Value Ratio (LTV)

- Link: https://johnmorelli.us/loan-to-value-ratio-ltv/
- Published: 2024-07-06T21:34:16+00:00
- Author: John Morelli

#### How to Calculate Loan to Value Ratio (LTV)

The loan to value ratio (LTV) is a fundamental measure of risk in the commercial
real estate market, most often used as part of loan sizing by lenders.

The loan to value ratio (LTV) is an underwriting metric frequently measured by financial
institutions, such as banks and institutional lenders, to analyze credit risk, particularly
when performing due diligence on residential and commercial mortgage applications.

**The LTV ratio compares the size of a requested loan to the appraised value of 
the property securing the financing.**

To elaborate, the underlying property pledged as collateral on which the lender 
possesses a lien can be seized in the event of default.

Commercial lenders frequently compare the total dollar value of the proposed loan
to the percent contribution of the borrower (i.e. the equity investment), including
the fair market value (FMV) of the property securing the loan.

The higher the down payment contributed by the real estate investor or home buyer,
the lower the loan-to-value ratio (LTV) – all else being equal.

**Generally, a “good” loan-to-value ratio (LTV) is perceived to be around 65% to
80% in the commercial real estate (CRE) market.**

However, the prevailing economic conditions and cyclicality in market demand, among
other external factors, can cause the target range to fluctuate.

But for the more risk-averse commercial real estate (CRE) lenders, the standard 
maximum loan-to-value ratio (LTV) is around 75%, which functions as a constraint
to limit the [loan size](https://insigniafs.com/loan-sizing/) (i.e. upper parameter)
and mitigate the risk of their lending portfolio.

The loan-to-value ratio (LTV) measures the relationship between two factors relevant
to lenders from a risk standpoint.

 1. **Secured Loan Amount** ➝ The total amount of debt capital provided by the lender
    as part of the financing arrangement.
 2. **Appraised Value of Pledged Asset** ➝ The appraised fair value of the secured 
    asset, such as a property, as of the current date.

#### Loan to Value Formula

The loan to value ratio (LTV) formula divides the loan amount by the appraised property
value.

**Loan to Value Ratio (LTV) = Loan Amount ÷ Appraised Property Value**

Where:

 * **Loan Amount** → The total size of the loan provided by the lender, or the amount
   requested by the borrower.
 * **Appraised Property Value** → The estimated fair market value (FMV) of the property
   on the present date.

Conversely, the property value can be switched out with the purchase price, assuming
the variance between the two is marginal.

Since the loan to value ratio (LTV) is expressed as a percentage, the resulting 
figure should then be multiplied by 100.