What is Loan to Value (LTV) and how is it calculated?
Updated: Apr 1, 2020
Loan to Value (LTV) is a ratio that compares the size of the loan you intend to take out to the value of the real estate project. Understanding the LTV ratio of a loan helps the lender gauge the financial risk associated with the loan.
For most new construction projects when determining the #LTV we are mostly concerned with the #FutureValue, or ARV, because we want to know what the project will be worth once it is completed. So, for the purposes of calculating the LTV on a new construction loan Builders Capital will consider the lesser of either the future appraised value, or the contract price in the Purchase and Sale Agreement (#PSA), if the property has been pre-sold.
Calculating the LTV is relatively simple. It is the Total Loan Amount / ARV:
If you know the maximum allowable LTV of a loan and you also know or can estimate the AIV you can easily calculate or estimate the Total Loan Amount as well:
In a scenario where LTV is the primary or only consideration the estimated down payment would simply be the difference between the As Repaired Value and the Total Loan Amount, or:
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