What is loan-to-value ratio?
- Definition
- Loan-to-Value Ratio is a risk assessment ratio that lenders perform when considering a real estate loan.
Most senior lenders use Loan-to-Value as one of the most important factors in determining the risk associated with a loan. Lenders divide the principal amount of the loan by the estimated value of the property. Most lenders will use an appraisal to obtain a value of a property and make an assessment based on their risk appetite for an acceptable loan amount.
Loan-to-value ratios of 65 to 75 percent are common for stabilized commercial real estate, with some property types and lenders extending to 80 percent for well-performing assets. During the real estate boom preceding the 2008 financial crisis, it was not uncommon to see LTV ratios of 80 to 90 percent or higher on commercial properties — levels that contributed to widespread defaults when property values declined.
