Loan to Value Ratio (LTV) is a critical metric in real estate investing and mortgage lending. As an experienced or aspiring real estate investor, understanding LTV is essential in making profitable investment decisions. Investors also need to understand LTV because hard money and conventional mortgage lenders use loan to value ratio as a critical metric when deciding whether to lend you money. Keep reading for a deeper understanding of what LTV is, how it’s calculated, and how to use it for winning in the real estate investing game.
What is Loan to Value Ratio?
For conventional mortgages, LTV measures a mortgage loan’s ratio to a property’s value. It is calculated by dividing the mortgage loan amount by the property’s appraised value. The resulting ratio is a percentage, with higher percentages indicating higher risks for the lender.
How to Calculate LTV
To calculate LTV, you need to determine the appraised value of the property and the mortgage loan amount. The formula for LTV is:
LTV = (Mortgage Loan Amount / Property Value) x 100%
For example, if the appraised value of a property is $500,000, and the mortgage loan amount is $350,000, the LTV would be calculated as:
LTV = ($350,000 / $500,000) x 100% = 70%
In conventional and hard money mortgage lending, LTV is crucial in determining the lender’s risk level. Typically, lenders require borrowers to have a lower LTV ratio to minimize the risk of default.
Additional Calculation For House Flips
When we are looking at the overall flipping project, it’s important to know that we also look at the “as-is value”. This means that we look at how much the home is worth as-is and then we look at how much the property will be worth after it has been flipped. Here are some additional calculations that we consider for house flips:
AIV-LTV: As-is value to initial loan amount
ARV-LTV: After repair value to total loan amount
We will have guidelines to follow for both amounts relating to the
For example: A property is worth $100,000 and a borrower wants to invest $30,000 in rehab to bring the property value up to $165,000. The hard money lender will lend $85,000 towards the purchase and fund $30,000 towards the rehab, for a total loan amount of $115,000. The AIV-LTV will be 85% and the ARV-LTV will be 70%.
How Do Loan To Value Ratios Affect Hard Money Loans?
Are you considering a hard money loan to fund a real estate investment property and are wondering what LTV ratio will get you approved for financing?
Hard money lenders are generally willing to take on higher levels of risk than conventional lenders, as long as the property is projected to cash flow. For this reason, hard money lenders may loan on a property with a 75 to 80% LTV ratio and lend up to 80% of the LTV ratio. Every hard money lender is different, but at HouseMax Funding, our terms are contingent on multiple factors. You may be able to get a larger loan depending on other financial considerations such as your credit score.
Common Mistakes and Misconceptions about LTV Ratios
Misunderstandings about LTV ratio can lead to costly mistakes for real estate investors. Here are some common mistakes and misconceptions to avoid so that you can succeed with real estate investing:
- Believing that a high LTV is always a bad thing: While a high LTV ratio may indicate a higher risk for the lender, it may also mean that the property has significant potential for appreciation.
- Failing to factor in repair and renovation costs when calculating LTV: These costs can significantly affect the LTV ratio and can impact the profitability of the investment.
- Believing that LTV is the only factor that matters when securing a mortgage: While LTV is an essential factor in securing a mortgage, lenders also consider other factors such as credit score, income, and debt-to-income ratio.
- Not understanding the difference between LTV and Loan to Cost (LTC) ratio: LTV is based on the appraised value of the property, while LTC is based on the total cost of the property, including purchase price and renovation costs.
- Assuming that LTV is the same for all types of mortgages: Different types of mortgages have varying LTV requirements, and it’s essential to understand the requirements for the type of mortgage you’re applying for.
- Failing to consider the impact of LTV on the terms and rates of your financing: A higher LTV ratio can result in higher interest rates and fees, making the mortgage more expensive in the
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At HouseMax Funding, we’re passionate about helping people succeed in real estate investing. We’re here to answer any questions you have about LTV ratios, different loan programs, and our application process.
Call us today with any questions or to start your financing application: 512-551-0727.