Understanding LTV and Why It is Important to Lenders

Posted by Mike Langolf on May 27, 2020 9:00:00 AM

LTV Concept

Loan to Value, or LTV, is the ratio of the loan amount divided by the value of a property:

LTV=Loan Amount/Property Value

Let’s assume a property is worth $1 million and the Borrower wants a loan of $750,000.  The LTV would be calculated as follows:

LTV= $750,000/$1,000,000

LTV=.75 or 75%

Typically, a lender is willing to loan more money against a stable cash flowing property like a multifamily building versus non-cash flowing raw land. The U.S. Office of the Comptroller of Currency, or OCC, publishes guidelines for national banks to follow in which the LTV for multifamily is capped at 85% and the LTV for raw land is capped at 65%.  

Using the appropriate OCC caps multifamily property and a piece of raw land both valued at $1 million, the loan amount would be calculated as follows:

Raw Land

65%= Loan Amount/$1,000,000

Loan Amount = $1,000,000 x 65%

Loan Amount= $650,000


Apartment Building

85%= Loan Amount/$1,000,000

Loan Amount = $1,000,000 x 85%

Loan Amount= $850,000


The example above shows how lenders use predefined LTV caps to limit risk. In commercial lending, underwriters may further adjust the loan amount and deviate from the maximum LTV in its guidelines to account for other conditions impacting a potential loan.  You may have noticed in lender advertising, the phrase “up to 85% LTV” to allow for appropriate adjustments as warranted.

So why do lenders care of about LTV?  There are at least two reasons.  First, LTV tells us something about how much “equity” or skin in the game the borrower has on a given property.  If the borrower fails to pay the lender back, the lender will foreclose on the property and sell it to recover as much as it can on its loan.  The borrower very likely will lose their equity which is the difference between the property value and the loan amount.  Second, and related to the first, the LTV describes how much cushion the lender has on the loan before they might lose some of their loan principal.  It is not free to foreclose on and resell a property.  So the lender wants to know that they have sufficient cushion to protect against the transaction costs associated with foreclosing and reselling a property along with any reductions in property value due to deferred maintenance or changed market conditions.

While LTV is a traditional measure of risk in making a loan, many underwriters point out that the value of a cash flowing asset is commonly valued based on the capitalization rate, or cap rate, and even small changes in cap rates can impact a property’s value and thus the LTV. In a separate blog, we will compare DSCR, LTV and Debt Yield

Contact Us to Learn More

Related: Understanding Debt Yield and Why It's Important to Lenders,  Understanding Capitalization Rate Formula

Topics: Finance

Most Popular

Disclaimers: Please note that our blog contains affiliate links, and at no additional cost to you, Visio Lending will earn a commission if you decide to make a purchase after clicking through the link. As an Amazon Associate, I earn from qualifying purchases. Please understand that we have experience with all of the companies we recommend, and choose to refer our borrowers and partners because they are helpful and useful, not because of the small commissions we make. Please do not spend any money on these products unless you feel you need them or that they will help you achieve your goals.


The information in this blog has been prepared solely for informational purposes. The contents are based upon or derived form information generally believed to be reliable although Visio accepts no liability with regard to the user's reliance on it. For legal advice, please contact your counsel.