Loan-to-Value Ratio (LTV) is a metric that compares the size of loan to the value of an asset. While most HUD multifamily loans are constrained by LTV, HUD 223(a)(7) loans are not. Instead, HUD 223(a)(7) loans simply must not exceed 100% of eligible refinancing costs. These include the outstanding balance of the loan, eligible repair costs, third-party reports, and other eligible expenses.

An LTV Ratio, or loan-to-value ratio, is a value (expressed as a percentage) that is used quite often in commercial mortgage finance and multifamily property financing to determine the ratio of a particular debt (like a first mortgage) relative to the value of the collateral (such as a multifamily or other commercial property in this case). So, for example, if a borrower owns a property worth $10 million and is looking to refinance the first mortgage for $8 million, the LTV is 80%.

Lenders utilize this figure to determine their level of risk as well as the borrower leverage in a transaction. The rule is the lower the LTV, the lower the risk. This formula is used primarily in the case of standard acquisitions and refinances. In the cases of multifamily property rehabilitation or ground-up construction, other factors like LTC (loan-to-cost) become more important factors.

The loan-to-value ratio, more commonly known as LTV, is an important metric in commercial real estate financing that compares financing to the value of the collateral. The loan-to-value ratio is one of the most important metrics to commercial mortgage lenders, which use it to gauge the level of risk and borrower leverage of any potential deal.

The formula for calculating the loan-to-value ratio is:

LTV = Loan Amount ÷ Total Value of Collateral

So, for example, if the owner of an office asset worth $10 million seeks to refinance the first mortgage on the property for $8 million, the transaction would have an LTV of 80%, as seen below.

LTV = 8,000,000 ÷ 10,000,000 = 80%

LTV is an important metric for lenders to determine how much debt to provide for a particular property. The ratio is calculated by dividing the loan amount by the appraised value of the property. The appraised value is determined by an independent appraiser and is based on the current condition and market value of the property.

For example, if an apartment building has an appraised value of $1 million and the lender is providing a loan for $700,000, the LTV ratio is 70%. This means that the lender is loaning 70% of the value of the property.

The maximum LTV ratio will depend on the lender and the type of property. Generally, lenders will offer lower ratios for higher-risk properties and higher ratios for lower-risk properties.

The maximum Loan-to-Value Ratio (LTV) for commercial real estate financing varies depending on the property type, underwriting factors, loan terms, market, etc. Generally, the lower the LTV, the lower the risk and more competitively priced loan. For example, if a building is worth $10 million and the existing loan is $6 million, the LTV is 60%.

In the case of multifamily property rehabilitation, or ground-up construction, other factors like Loan-to-Cost (LTC) also become important. When LTV is used in rehab, construction, or other value-add financing opportunity, it is used as a leverage constraint for the finished, or stabilized value of the property. For instance, if the cost to build a property is $10 million, and when it's complete and stabilized it's worth $20 million, and the lender has constrained you to the lesser of 75% LTC or 70% LTV, your loan would be the lesser of $7.5 million (75% LTC) and $14 million (70% LTV).

The benefits of a low Loan-to-Value Ratio (LTV) are that lenders can assess the risk of a loan and decide how much debt to provide. A lower LTV ratio is seen as lower risk and may result in a lower interest rate or a larger loan amount. This means that the borrower will have to put less money down and can therefore use their capital for other investments.

Sources:

• LTV: Loan-to-Value Ratio in Relation to HUD 221(d)(4) Loans
• LTV Calculator
• What is Loan-to-Value Ratio (LTV)?

The risks of a high Loan-to-Value Ratio (LTV) are that lenders consider it to be a higher risk loan due to the lack of equity in the property. This can result in higher interest rates or a smaller loan amount. Additionally, borrowers with a higher LTV ratio will have to put more money down and may not have capital for other investments. (Source 1, Source 2, Source 3)