The loan-to-value (LTV) ratio is the amount of your loan relative to the value of the collateral it’s secured by. The LTV ratio is commonly used by lenders in determining whether to approve a loan and the specific rates and terms that will be offered. Examples of loans that commonly use an LTV ratio include real estate, auto, and equipment loans.
You can use the following formula or calculator to figure out the LTV ratio for your loan:
Loan to value | = | Loan amount |
Value of the loan’s collateral |
Examples of How To Calculate the Loan-to-Value Ratio
The LTV ratio can be applied to any loan that is secured by collateral. While the methods used in determining the value of the collateral may vary slightly depending on the type of loan, the LTV calculation itself remains the same.
Below are some examples of how the LTV ratio can be calculated for different types of loans:
Real Estate Loan | Equipment Loan | Vehicle Loan | |
---|---|---|---|
Loan Amount | $500,000 | $250,000 | $55,000 |
Value of Collateral | $1.2 million appraised value of home | $400,000 purchase price of equipment | $60,000 purchase price of equipment |
LTV Calculation | $500,000 ÷ $1.2 million = 41.67% (LTV) | $250,000 ÷ $400,000 = 62.5% (LTV) | $55,000 ÷ $60,000 = 91.67% (LTV) |
What Is Combined Loan-to-Value & How Do You Calculate It?
When a loan is secured by a single loan, lenders will look at the LTV ratio. However, if a loan currently is or will be secured by multiple loans, you’ll need to know how to calculate the combined loan-to-value (CLTV). The CLTV is calculated by taking the sum of all loans and dividing it by the value of the property or other type of collateral.
Combined Loan-to-Value | = | Sum of all loans |
Appraised value of property (or other collateral used for the loan) |
Below is an example of how the CLTV ratio would be calculated for a real estate loan:
Real Estate Loan Example | |
---|---|
Existing First Mortgage | $150,000 |
Existing Second Mortgage | $75,000 |
Proposed Third Lien | $25,000 |
Sum of All Current and Proposed Mortgages | $150,000 + $75,000 + $25,000 = $250,000 |
Appraised Value of Property | $400,000 |
CLTV Ratio Calculation | $250,000 (sum of mortgages) ÷ $400,000 (value of property) = 62.50% (CLTV) |
How Lenders Determine the Value of Collateral
To determine what figure to use for the value of collateral in calculating the LTV ratio, lenders can make use of certified appraisers, gather data on current selling prices of similar items, or simply use the purchase price the borrower has agreed to pay.
The type of asset being used for the loan can also dictate what methods a lender will use to determine the value for purposes of the LTV calculation.
Real Estate Loans
If you’re getting a loan for a real estate property, lenders will commonly hire a certified appraiser. To determine what the property is currently worth and what it might sell for today, appraisers generally look at the condition of the property, as well as similar properties that have recently sold.
Below are additional items that the appraiser may consider in reaching an opinion of value:
- Average days on market for similar properties
- Sales price of recently sold properties
- Comparison of size and property features to comparables
- Seller concessions or incentives
- Condition of property
Equipment or Vehicle Loans
Similar to appraising real estate, common methods for determining the value of equipment can involve conducting research to see what similar equipment is currently being sold for. Other factors that can be considered can include the following:
- Current purchase price (if buying equipment brand new)
- Depreciation for used equipment
- Available supply for the equipment or vehicle being purchased
- Make and model
- Condition of equipment (including features, age, and mileage, if applicable)
Why Loan-to-Value Is Important
Your LTV can determine whether you are eligible for a loan and can also impact the rate you get. LTV requirements can be determined by the type of loan you’re applying for and the lender’s guidelines. In general, an LTV of 80% or lower is considered good.
From a lender’s perspective, a low LTV ratio translates to a lower level of risk. This is because defaulting on the loan can allow the lender to take possession of the asset, which it can then sell to recoup its losses. The lower the LTV, the easier it will be to cover these losses since the value of the collateral will be larger than the defaulted loan amount.
Lower LTV ratios also tend to correspond with lower debt-to-income (DTI) ratios, comparing the amount of your monthly debt payments to your income. DTI is commonly considered as a key factor in loan approvals, something we discuss in our guide on small business loan requirements. You can learn more about how to calculate DTI in our article on the DTI ratio.
To give you the best chances of approval, you can work with a broker like Lendio. It has a network of over 75 individual lenders, each with a different set of qualification requirements. By applying, a loan specialist will work with you to match you with the lender whose terms and requirements best suit your needs.
Pros & Cons of a Low Loan-to-Value Ratio
PROS | CONS |
---|---|
Can make it easier to get approved for a loan | Requires a larger down payment |
More likely to qualify for lower rates | Can deplete available funds to cover unexpected expenses or cash flow shortages |
Your monthly payments will be lower since your loan amount will be smaller | Reduces amount of funds to invest in growing other areas of your company |
You can avoid added expenses associated with certain loans, such as private mortgage insurance for real estate |
Pros & Cons of a High Loan-to-Value Ratio
PROS | CONS |
---|---|
Smaller down payment requirement allows you to preserve working capital | May be more difficult to get approved for a loan |
Allows you to retain funds to be invested in other areas of your business | You may not qualify for the lowest advertised rates |
High LTV lenders are more likely to be flexible in qualification requirements | You’ll have larger monthly loan payments |
How To Lower Your Loan-to-Value Ratio
Since the LTV ratio is determined by your loan amount and value of the item being purchased, you have two options for lowering this ratio:
- Make a larger down payment: With a larger down payment, you won’t need as large of a loan, which will result in a lower LTV ratio. A larger down payment means you’ll have less working capital to use in other areas of your business, but it can lead to more affordable loan payments, a better chance of getting approved for a loan, and the ability to get more favorable rates and fees.
- Purchase something more affordable: Buying something that costs less can result in a lower LTV ratio if you use the same down payment amount. This also means you’ll have a lower loan amount, and, therefore, more affordable monthly payments.
Frequently Asked Questions (FAQs)
The LTV ratio is calculated by taking the loan amount and dividing it by the value of the collateral being pledged for the loan. Common types of collateral can include equipment, real estate, and other business assets.
An LTV of 80% and under is typically considered advantageous for improving your odds of approval and qualifying for competitive rates. However, this can vary depending on the type of loan you’re getting as well as your other business qualifications.
For mortgage loans, the LTV ratio only takes into consideration the first lienholder. It does not factor in the balances of any second mortgages or other liens against the property. An LTV ratio also does not give any insight into the strength of a borrower’s credit or finances.
Bottom Line
The LTV ratio is a key factor lenders often use in determining whether to approve you for a loan. It is typically used for loans that are secured by some type of collateral, such as real estate or equipment. Knowing what a lender’s LTV limits are can help you choose a loan best suited for your needs and can also help you determine your chances of getting approved. Head over to our guide on how to get a small business loan for more tips on improving your chances of landing a loan approval.