You will hear the terms equity and loan to value thrown around as if they are golden tickets to the Wonderful World of Loan Approvals. Ah, if you haven’t read the other deal analysis and collateral valuation articles … well then, you might still think that’s true.
Go on, read them. We’ll wait.
For the rest of you, your equity in a property and the loan-to-value only have real value within the context of the the rest of your deal.
First, a tour of terms
Equity and loan to value (LTV) both refer to the difference between what the property is worth and how much you owe (or will owe) on it. If you own a property worth $100,000 and owe $60,000 on it, your LTV is 60% and your equity is 40%.
Loan to Value: What lenders care about
A 60% LTV is generally the baseline from which lenders start on what they want, adding and subtracting according to the other factors involved in your 3 C’s and their own personal risk tolerance.
Most of these factors will not have a calculation or figure attached to them, instead helping contribute to the lender’s overall feeling of risk in the loan. One factor that does have significant play is the size of the loan in relation to the LTV.
For example, consider our $100,000 loan above. While 40% equity sounds amazing, $40,000 as a cushion on a big renovation project … not so much. But 40% on a $1,000,0000 commercial loan is a $400,000 safety net.
Does no equity mean no loan?
Not if you’re willing to work with the lender to “make up” the difference. In a process called cross-collateralization, most lenders will accept other collateral as a guarantee to the loan. This may be in the form of other real estate you own free and clear or other assets you own.
Think instead in terms of what you can bring to the table to further assure the lender that the risk of them losing their money is nominal.