Loan-to-value is the loan amount divided by the property's value. A 65% LTV on a $2M building is a $1.3M loan. It is one of the two brakes a lender applies, the other being DSCR, and the loan is sized by whichever brake bites first. In a high-rate market that is usually DSCR, which is why quoted maximum LTVs often cannot actually be reached.
LTV=Loan amountProperty value
Loan amount=Property value × Maximum LTV
- Loan amount
- The principal the lender advances at closing.
- Property value
- The appraised value or the purchase price, whichever is lower.
- Maximum LTV
- The ceiling in the lender's program, before the coverage test is applied.
- One of two brakes. The lender funds the smaller result of this line and the DSCR line, never the larger.
- Blind to income. It measures the asset, not the ability to pay, which is why it rarely binds first when rates are high.
- An appraisal below the contract price raises the equity required. It does not lower the price or raise the loan.
- An advertised maximum LTV is a ceiling, not an offer.
The same building, with the bank advertising 65% loan to value.
The advertised LTV was never wrong. It simply was not the number doing the deciding.
Related terms
All termsDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
FinanceLeverage
Leverage is using borrowed money to control a larger asset than cash alone would buy.
FinanceCapital Stack
The capital stack is the ordered list of everyone whose money is in a deal and who gets paid back first: senior debt at the bottom, then any secondary debt, then preferred equity, then common equity on top.
Terms arrive with the writing.
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