Understanding Loan-to-Value (LTV) in Hard Money Lending

ryan4099
Apr 18
2 min read

When it comes to hard money lending, one of the most crucial factors both lenders and borrowers need to understand is Loan-to-Value (LTV) ratio. This metric plays a key role in determining loan eligibility, risk assessment, and investment potential. Whether you’re an investor seeking financing or a lender evaluating deals, knowing how LTV works will help you make informed decisions.

What Is Loan-to-Value (LTV)?

Loan-to-Value (LTV) is a ratio that compares the loan amount to the value of the asset being used as collateral. In hard money lending, this is typically real estate. Lenders use LTV to assess risk—generally, the lower the LTV, the lower the risk for the lender.

LTV FormulA:

The Loan-to-Value (LTV) ratio is calculated by dividing the loan amount by the property's appraised value and then multiplying by 100 to get a percentage. It shows how much of the property’s value is being financed, helping lenders assess risk.

For example, if a lender provides a $500,000 loan on a property worth $1,000,000, the LTV would be 50%.

Why Does LTV Matter in Hard Money Lending?

1. Risk Assessment

Lenders use LTV to determine how much risk they are taking on. A lower LTV means more equity in the property, reducing the lender’s exposure if the borrower defaults. Hard money lenders typically set LTV limits around 50% for new construction and 75% for Fix-N-Flips, depending on the type of property and market conditions.

2. Loan Approval & Terms

LTV impacts loan approval and terms, such as:

Interest rates: Lower LTV often results in better loan terms and lower rates.
Loan amount: Higher LTVs mean larger loan amounts, but they also carry more risk.
Down payment requirements: Borrowers may need to provide more capital upfront if the LTV is high.

3. Exit Strategy Considerations

Investors need a clear exit strategy when using hard money loans, whether through refinancing, selling, or another approach. A lower LTV improves refinancing options with traditional lenders, making it easier to secure long-term financing once the property is stabilized.

How Hard Money Lenders Determine LTV

Hard money lenders determine LTV based on either the As-Is Value or the After-Repair Value (ARV) of a property:

As-Is Value: The current market value of the property.
After-Repair Value (ARV): The projected value after renovations or improvements. Lenders offering rehab loans may base LTV on ARV, allowing investors to borrow more based on the property’s potential worth.

LTV vs. Other Important Metrics

While LTV is a primary consideration, lenders also evaluate:

Debt Service Coverage Ratio (DSCR): Measures the property’s income relative to debt payments.
Borrower’s Experience: More experienced investors may receive more favorable LTVs.
Property Type & Location: Some property types or markets are considered riskier, affecting LTV limits.

Final Thoughts

Understanding LTV is essential for both borrowers and lenders in hard money lending. It influences loan approvals, risk assessments, and overall investment success. As an investor, keeping LTV in check ensures you have enough equity to weather market fluctuations and secure better financing options in the future.

If you’re considering a hard money loan, make sure to evaluate your LTV carefully and work with a reputable lender who can help structure the best financing solution for your needs. Need expert guidance? Contact 365 Lending Group today at 936-203-1735 to discuss your lending options!