When securing financing for a real estate deal, one of the most important terms you’ll come across is Loan-to-Value (LTV). Whether you’re applying for a traditional mortgage or a hard money loan, LTV plays a key role in determining how much money a lender is willing to provide and what terms you’ll receive.
What Is Loan-to-Value (LTV)?
LTV is a ratio that compares the loan amount to the property’s value. It’s calculated by dividing the loan amount by the appraised property value or purchase price—whichever is lower.
For example:
- Property value: $200,000
- Loan amount: $140,000
- LTV = 70%
A lower LTV means you’re borrowing less relative to the property’s value, which generally makes you a lower-risk borrower.
Why Does LTV Matter?
- Risk Assessment: Lenders use LTV to gauge risk—higher LTVs mean less borrower equity and more risk for the lender.
- Loan Approval: Many lenders have maximum LTV limits. For hard money loans, this usually ranges from 65% to 75%.
- Rates & Terms: Borrowers with lower LTVs often receive better interest rates and lower fees.
LTV in Hard Money Lending
Hard money lenders place heavy emphasis on LTV because loans are asset-based. Unlike traditional banks that focus on credit scores and income, hard money lenders care primarily about the property’s value.
A lower LTV means the borrower has more “skin in the game,” which reassures the lender that the borrower is less likely to walk away from the project.
How to Lower Your LTV
- Increase Your Down Payment: The simplest way to reduce LTV is to put more money down.
- Negotiate a Lower Purchase Price: Getting a better deal on the property improves your LTV automatically.
- Add Value Through Renovation: For fix-and-flip projects, value-added improvements can improve LTV over time.
Final Thoughts
Understanding LTV helps you approach lenders with stronger financing options. If you’re working with a hard money lender, expect them to focus on the property’s value and your equity contribution more than your credit history. By keeping your LTV low, you increase your chances of approval, secure better terms, and set yourself up for a more profitable investment.