What does loan-to-value (LTV) mean, and why do private lenders cap it?
Loan-to-value is the loan amount divided by the property's value, expressed as a percentage. A $210,000 loan on a $300,000 property is 70% LTV. Private lenders cap LTV, often around 65 to 70%, so that if the borrower defaults and the property must be sold, there is room to recover the loan even after a price drop and foreclosure costs. Always ask whether the "value" is today's as-is value or a projected after-repair value.
LTV is the single most useful number for understanding a lender’s downside.
The math
LTV = loan amount ÷ property value.
- $195,000 loan on a $300,000 house = 65% LTV. The property could lose 35% of its value before the lender’s principal is at risk.
- $270,000 loan on the same house = 90% LTV. A 10% drop, plus foreclosure costs, and the lender is losing money.
Which “value”?
This is where the number gets slippery. A lender might quote 70% LTV against:
- As-is value: what the property is worth today, in its current condition. Conservative.
- After-repair value (ARV): what it should be worth once the renovation is finished. Optimistic until the work is done, because if the project stalls halfway, the collateral is a half-finished house, not the finished one.
A 70% loan on ARV can be a 100%+ loan on as-is value the day it closes. Neither is wrong; they are different risks, and you should know which one you are taking.
Loan-to-cost
A related measure: LTC = loan amount ÷ total project cost (purchase + rehab + costs). It tells you how much of the project the borrower is funding with their own money. A borrower with real cash in the deal has more reason to finish it.
Why the cushion matters
Foreclosure is not free. Legal costs, months of unpaid interest, holding costs, repairs to make the property saleable, and selling costs all come out of the sale before the lender is repaid. The gap between the loan and the value is what pays for all of that. Conservative LTV is how a lender makes a bad outcome survivable, which is why it is one of the first questions on the collateral page.