Most people think credit history is the most important factor when hard money direct lenders look at their application. An important concept in real estate, particularly when seeking mortgage approval, is the loan-to-value ratio or LTV. Lenders will assess this if you’re an investor and applying for a real estate loan.

What Is Loan-to-Value?

An LTV ratio is essentially a comparison of the size of your loan to the value of the property used to secure it. The higher the ratio, the greater the risk. It means the assets backing the loan are less likely to pay it off and tells you how much of a home, auto, or another property you own compared to the amount you still owe.

Loan-to-Value Formula

Your LTV is calculated using a simple formula: Loan-to-Value ratio = Mortgage Amount/Appraised Property Value. A loan-to-value calculator can help you determine your LTV even faster.

To calculate your ratio, divide the total mortgage loan amount into your home’s total purchase price. This number matters to your investment because the meaning of LTV to lenders reflects your level of risk. A high ratio can affect your eligibility to buy a home or borrow against equity; lenders also use your loan-to-value ratio for refinancing a mortgage.

If lenders feel they are more at risk, it can be harder to be approved for a loan, your interest rate may be higher, or additional costs such as mortgage insurance may apply.

Loan-to-Value Ratio Example 

Here are a few real-life examples of where a loan-to-value ratio can be used.

Scenario: A borrower has a first trust deed amounting to $25,000 and is seeking a second trust deed for $40,000.

The property has a value of $100,000.

Let’s use the loan-to-value formula to find the loan-to-value ratio:

(first trust deed) $25,000 + (second trust deed) $40,000 / $100,000 = 65% loan-to-value ratio


Combined Loan-to-Value Ratio

If you have multiple secured loans on a property, the combined loan to value (CLTV) ratio uses the same calculation but factors in the sum of all loans. Second mortgages, home equity lines of credit, and other balances will be added to your first mortgage. The CLTV will always be equal to or greater than your LTV ratio. Mortgage lenders allow higher CLTV limits.

Apply with Equity Wave Lending, Inc. Today

Have you been turned down by the bank and require financing? Our hard money lenders in Southern California will work with you. Feel free to use our LTV calculator and other resources. Our loan servicing professionals are available to answer your questions and assist in getting a loan for your investment. To get started, call Equity Wave Lending, Inc. at 888-399-8881.