Updated: Feb 15
Loan to value ratio, or LTV, is calculated by dividing the proposed loan amount by the current fair market value of the property securing the loan.
For example: If a borrower wants to take out a $50,000 hard money loan on a property worth $100,000 the LTV would 50%.
Combined loan to value ratio, CLTV, is calculated when there are two are more loans on a property.
The first position lien on the property is always the most secure, which is why most lenders prefer to take that position. That’s why you should try not to split your funding in a way that makes it difficult for you to get a second lien position. Some firms offer specialized funding loans that take into account this division, whereby they will fund 50% of the purchase price contingent on the remainder being financed. Arguably, in this scenario, the first lien has the most secure position, because they are not only covered in equity. Further, they are assured that the borrower has secured funding for the full purchase of the property in question.
The Importance of LTV
LTV is an important factor when assessing your loan approval. Remember the primarily focus is to lend on the net asset valuation, and not the the individuals ability to repay the obligation. Most private or hard money lenders also require a minimum credit score in order to move forward, while we can focus on valuations and exit strategies.