You might as well take the time to familiarize yourself with this term that you will come across frequently in your investing. LTV stands for Loan-to-Value. It is a ratio of how much the lender is putting up (lending) to the value of the property.
%LTV = $Loan / $Value
Loan
The purchase amount is whatever was agreed upon in the purchase agreement. The bank may agree to fund a certain portion of this amount, but rarely the full amount. Whatever is left over might be called the down payment. It is the ‘skin in the game’ that the buyer needs to put in, in order to have some risk. The bank hopes that this interest in the property encourages the buyer to treat it well, to make income, and most importantly, to make mortgage payments.
Value
The value is usually whatever the purchase price is; however, not always. The value that the bank sees is whatever amount the property appraised. Usually, there is the appraisal price and the price on the purchase agreement; the value is whichever is lower.
Loan-to-Value
Your banker will be able to tell you what LTV they offer for a particular deal and lendee up front. If the lendee (the purchaser who is getting the loan) is getting a FHA loan they might have an LTV of 97%, meaning the bank will pay 97% of the value and the lendee comes up with the remaining 3%. Typically, commercial loans have an LTV of 70-80%.
You can work backward to find the loan amount. If the value is $500,000 and the LTV is 80%, then
80% = x (the loan) / $500,000 (value)
Solving for x, we get $400,000. That’s what the bank is willing to pay. Simply subtract that from the value to get what the lendee needs to bring: $500,000 – $400,000 = $100,000.
Start using this term when talking to bankers. Using the same language means more efficient communication and the banker will think you are a pro!
