Loan to value is a very crucial ratio for mortgage lenders. This ratio represents the share of value of a home which is debt (i.e. loaned by banks or private lenders) against the total overall value of the home.
For example, let’s consider a home owner who has a property worth $1,000,000 and they have a first mortgage for $700,000 from the bank. Now they would like to request a second mortgage from a private lender for $100,000.
In this scenario, the LTV of this second mortgage deal would be 80%
$800,000 (Combined Value of Loans) / $1,000,000 (Value of Property) = 80%
In practice, the lower the LTV value, the stronger the deal because the home owner has a greater percentage of remaining equity protecting the private lender’s investment.
Note: In the above example the home owner has 20% equity remaining in the home ($200,000).
Investors of private mortgages generally like to have a minimum of 15% equity remaining in the property. (i.e. maximum LTV 85%)