Loan To Value Ratio (aka LTV) is term and/or calculation that is used in the mortgage lending and mortgage buying industries to determine the dollar amount financed with relation to the collateral value (or property value) that the loan is secured by.
The way to figure the loan-to-value on a real estate transaction is taking the dollar amount that is owed or that is being financed and dividing it by the property/collateral value. The higher the LTV percentage, the riskier the loan or investment is to banks or note buyers.
CALCULATING LOAN-TO-VALUE (OR LTV)
Let’s use the following example. Assume that a person is selling a loan to an investor and they want to calculate the loan-to-value before submission. One would take the remaining unpaid balance and divide it by the current property value. Let’s assume that the unpaid balance is $133,567.33 and the property value is $175,500. If we divide the small number of $133,567.33 by the larger number of $175,500 the LTV percentage is: 76%.
Balance Owed: $133,567.33
Property Value: $175,500
LTV = $133,567.33 / $175,500 = 76%
HOW THIS AFFECTS THE SALE OF A NOTE
Every buyer has a different investment appetite and purchase criteria which comes into play when a seller submits their mortgage loan for pricing on the secondary market. Most buyers have a maximum LTV criteria of 80% (meaning 20% cash down or equity in the property).
Fortunately, we at AX will allow an LTV of 100% on residential notes (meaning nothing put down by borrower) and an LTV of 90% on commercial notes (meaning only 10% put down by borrower). Keep in mind though, the more money that the borrower puts down (or equity in the property), the more your private mortgage loan is worth to a buyer.
Always try to collect the largest down payment possible when creating a seller-financed real estate loan. To learn more about creating a high-value mortgage loan, click here. To learn more about creating a high-value business loan, click here. To view the proper definition of Debt-To-Income Ratio, please click here.