Loan-to-value, or LTV, is one of the most important numbers in real estate.
LTV is the loan amount compared to the value of the property. If you are buying a $100,000 property with an $80,000 loan, you have an LTV of 80%.
Here’s the equation:
Loan-To-Value = Loan Amount / Property Value
Keep in mind that the property value and purchase price are not always the same. In this case, the lower of the two will be used to calculate LTV. For instance, if you are buying an apartment building listed for $500,000, but it appraises for $490,000, your maximum LTV will be based on $490,000. And if the property sells for less than its appraised value, the lower of the two will still be used.
Why is this number important? It’s determines the maximum loan a lender will give you. For instance, if you find a loan with a maximum LTV of 75%, that means you have to come up with a 25% down payment.
Common LTV maximums are 80%, 75%, 70%, and so on. The lower the LTV, the safer your loan is. That’s why you often see lower rates and better terms on lower LTV loans.
Why do lenders care so much about LTV? A couple reasons:
Skin in the game. The more money a borrower puts down on a property, the less willing he or she is to default on the loan. If you put down $250,000 on a $1 million multifamily property, you are much more invested in its success than if you put $50,000 down.
Foreclosure resale value. The lender must reposes (foreclose on) a property if it does not receive loan payments. Foreclosed property tends to sell for less than market price. By then, the property probably has problems. With 25% equity in the property (75% LTV) for instance, the lender is more likely to receive its loan amount back upon resale.
So what if you have more than one loan on the property or are seeking additional financing to acquire? The lender will take any other liens into consideration and come up with a Combined Loan-To-Value or CLTV.
CLTV = All Loans / Property Value
For instance, you are buying a $1 million property. You have a 75% LTV first mortgage ($750,000). The seller agrees to finance 15% ($150,000). While your LTV is still only 75%, your CLTV is 90% ($750k + $150k / $1 million). Lenders will review the loan and offer rates and terms based on the combination of loans.
Keep in mind that each lender is different. Some will base some of the rates and terms on just the LTV, others will charge higher rates and fully “hit” you with the full CLTV.
So is it best to go for the lowest LTV? It depends on your goals. If you have very little down payment, you won’t have much choice but to find a lender that allows a high LTV, say 85-90%.
If you have substantial savings, you will certainly find more multifamily lenders willing to offer you a loan at 70-80% LTV.
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