LTV: Borrowing Against Accepted Value
Loan-to-value compares a defined loan amount with the lender’s accepted property value. A $225,000 loan against $300,000 value has 75% LTV. The denominator is value, not automatically the purchase price or the investor’s total investment. On purchases, a program may use the lower of price and appraised value or another stated basis.
Confirm the numerator too. Some analyses use a single mortgage, while combined loan-to-value includes additional secured debt. A construction lender may test the total commitment rather than only the amount currently disbursed. Comparing different numerator definitions makes two term sheets appear more similar than they really are.
Value depends on condition, legal use, location and market evidence. A seller’s asking price, online estimate or planned improvement is not automatically an accepted appraisal basis. If the appraisal is lower than expected, the maximum loan can shrink even when the contract price stays fixed. Higher equity may help leverage but does not eliminate borrower, property or income requirements. Always label the effective date and condition of the valuation. The same building can have a current as-is opinion and a prospective as-completed opinion; using one in place of the other can materially misstate leverage and the cash required to close.
Worked example
Contract price is $300,000 and accepted appraisal $280,000. Under an illustrative lower-of purchase rule at 75% LTV, maximum financing is $210,000. The purchase-price gap is $90,000 before fees, not $75,000. The investor cannot force the lender to use the higher contract price.
Mini glossary
- LTV
- Loan amount divided by accepted property value.
- CLTV
- Combined secured loan amounts divided by accepted value.
- As-is value
- Value in the property’s current condition.
Put it into practice
Calculate LTV using both expected and lower appraised values. Identify whether your loan amount is funded balance or commitment. Ask the lender which value basis applies to a purchase and whether subordinate debt is allowed or included. Show the resulting acquisition equity separately from closing costs.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.