Understanding Investment Property Loan to Value Ratios

Investment property loan to value (LTV) ratio is an important concept for real estate investors to understand. The LTV ratio compares the amount of a loan to the appraised value of the property being purchased. It is one of the key factors lenders consider when approving financing for an investment property purchase.

In this comprehensive guide, we will cover everything you need to know about investment property LTVs, including:

• What is LTV ratio
• How LTV ratios work for investment properties
• Typical LTV ratios for different property types
• Factors that affect your maximum LTV
• How to calculate LTV
• Tips for improving your LTV ratio
• LTV impact on investment property loans

What is a Loan to Value Ratio?

The loan-to-value ratio is a simple formula that measures the amount of financing used to buy a property relative to the appraised value of that property.

It compares the loan amount to the total property value. For example, if you purchase a $100,000 investment property with a $80,000 loan, your LTV is 80% ($80,000 divided by $100,000).

The LTV ratio shows the percentage of the property purchase price that you are financing with borrowed money It demonstrates how much equity you will have in the property

A lower LTV means you are making a larger down payment and have more equity invested upfront. A higher LTV means you are borrowing a greater percentage of the purchase price

How LTV Ratios Work for Investment Properties

LTV requirements tend to be stricter for investment property loans compared to primary residence loans Lenders view investment properties as riskier, since the borrower does not live in the property.

Here are some key differences in LTV ratios for investment property vs residential property loans:

• Lower Maximum LTV – Investment properties often have lower maximum LTVs that lenders will approve. For a primary home, LTVs up to 97% are possible. For an investment property, 75-85% LTV is more common.

• Larger Down Payment Required – To keep LTVs lower, a 20-25% down payment is usually needed on an investment property vs 3-5% down on a primary residence.

• Rate/Term Impact – The LTV ratio also affects mortgage rates and terms. A lower LTV generally means better interest rates and terms from lenders.

Typical LTV Ratios by Property Type

The maximum investment property LTV a lender will approve can vary based on factors like property type, loan program, and more. Here are typical LTV ranges:

• Multi-Family – Up to 80% LTV but averages around 73%
• Single Family Rental – Up to 80% LTV but averages 75-76%
• Retail – Up to 75% LTV
• Office – Up to 75% LTV
• Industrial – Up to 75% LTV
• Hospitality – Up to 70% LTV

As you can see, multi-family properties tend to have the highest LTVs, while other commercial/investment property types have stricter lending limits.

What Factors Impact Your Maximum LTV?

Several factors determine the max LTV a lender is willing to offer on an investment property loan. These include:

Your Down Payment Amount – The larger your down payment, the lower your LTV will be. 20-25% down is typical for investment properties.

Loan Program – FHA programs allow higher LTVs than conventional loans. Loan programs through Fannie Mae and Freddie Mac have max LTV limits.

Property Type – As shown above, multi-family and single family rental properties have higher allowable LTVs than other commercial properties.

Your Credit Score – Borrowers with higher credit scores qualify for the best LTVs and loan terms. Minimum scores vary by lender.

Debt-to-Income Ratio – Lenders limit maximum debt-to-income ratios, which impacts how much you can borrow relative to property value.

Your Experience – First-time real estate investors may have stricter LTV limits than experienced investors with a proven track record.

How to Calculate LTV Ratio

Figuring out the LTV ratio for an investment property loan is simple. Just follow this formula:

Loan amount ÷ Total property value = LTV ratio

For example:

• $240,000 investment loan
• $300,000 property value
• $240,000 ÷ $300,000 = 80% LTV ratio

When determining the property value, lenders will order an appraisal. The appraised value is used to calculate LTV, not necessarily your purchase price.

Tips for Improving Your Investment Property LTV

If your investment property loan application is getting rejected due to a high LTV ratio, here are some tips to improve it:

• Make a larger down payment to lower the amount you need to borrow. This automatically decreases your LTV.

• Look into different loan programs like FHA that offer higher LTV limits.

• Bring in a co-signer or partner with better credit/income to strengthen your application.

• Purchase a lower priced property to lower the amount you need to finance.

• Use a lower appraisal value based on comps instead of an inflated purchase price.

• Pay down debts to improve your DTI ratio and qualify for a larger loan amount.

How LTV Impacts Investment Property Loans

The LTV ratio is one of the most critical factors lenders review when approving financing for real estate investors. Here are some key ways LTV impacts investment property loans:

Loan Approval – If your LTV is above the lender’s maximum limits for the property type, your loan application will be denied.

Interest Rates – The lower your LTV, the better the interest rate a lender is likely to offer, all else equal.

Loan Amount – Your maximum loan amount is limited by LTV caps. With a lower LTV, you may qualify for a higher loan amount.

Down Payment Required – To meet LTV requirements, you will likely need around 20-25% down for an investment property.

Mortgage Insurance – If your LTV is above 80%, most lenders require mortgage insurance, adding to your costs.

Loan Terms – Lenders offer better terms, like longer amortization and fixed rate periods, to borrowers with lower LTVs.

The Bottom Line

The loan-to-value ratio influences countless aspects of financing an investment property purchase. By understanding LTVs, improving your ratio, and picking the right loan program, you can secure approval for a loan that aligns with your real estate investment objectives.