What Is Loan-to-Value (LTV) in Real Estate Lending?
By Sierra Davis, Principal & Fund Manager, Essential Income Fund I, LLCPublished Last reviewed
Short answer
Loan-to-value (LTV) is the loan balance divided by the property's value, expressed as a percentage. A lower LTV means more borrower equity stands between the loan and a loss, so if the borrower defaults, the property is more likely to cover the debt plus the costs of recovering it.
If I could look at only one number before lending against real estate, it would be loan-to-value. It's the number that tells me how much room I have if something goes wrong.
How to calculate LTV
If there's more than one loan on the property, lenders also look at combined LTV (CLTV), which adds every lien together. A second-lien lender cares about CLTV because the first lien gets paid before them.
Why a lower LTV protects the lender
Equity is the cushion. If a borrower stops paying and the lender has to take the property back, that cushion has to cover a lot more than the loan balance: legal fees, property taxes, insurance, repairs, months of holding time, and often a discount to sell quickly.
| LTV | Borrower equity | Value drop the cushion absorbs |
|---|---|---|
| 50% | 50% | Up to 50% |
| 60% | 40% | Up to 40% |
| 70% | 30% | Up to 30% |
| 80% | 20% | Up to 20% |
| 90% | 10% | Up to 10% |
Recovery costs eat into that cushion, which is why a loan can lose money even when the property is still worth a little more than the balance.
Investment-to-value (ITV): the number note buyers should watch
LTV tells you how much the borrower owes relative to the property. But if you buy an existing note at a discount, you didn't invest the full balance. Investment-to-value (ITV) measures what *you* actually paid against the property's value.
When I buy performing notes, the goal is an ITV below the LTV. That gap is built-in protection. It isn't always there, though. Some notes are priced close to the balance, and that's exactly when the rest of your underwriting has to carry more weight.
What LTV doesn't tell you
- Whether the value is real. LTV is only as good as the valuation behind it. Use an independent appraisal or broker price opinion, not the seller's estimate.
- How long recovery takes. The same LTV is a very different risk in a state where foreclosure takes months versus years. See what happens when a borrower defaults.
- Lien position. A 60% LTV second lien behind a large first mortgage is not the same as a 60% LTV first lien.
- Whether the borrower will keep paying. That's about the payer: payment history, equity, and how they were qualified. See performing mortgage notes.
- Whether the paperwork holds up. Collateral only protects you if the documents let you enforce the lien.
Frequently asked questions
What is a good loan-to-value ratio for a private real estate loan?
Lower is more conservative. Many private lenders stay at or below 70% to 75% LTV; Sierra Davis usually underwrites at 70% or less, which leaves at least a 30% equity cushion to cover recovery costs and market changes.
What is the difference between LTV and ITV?
LTV divides the loan balance by the property value; ITV divides the amount an investor actually paid for the note by the property value. When a note is bought at a discount, ITV is lower than LTV, giving the investor a larger cushion than the loan balance alone suggests.
What is combined loan-to-value (CLTV)?
Combined loan-to-value adds together every loan secured by the property and divides by its value. It matters most to junior lenders, who are repaid only after the senior loan.
Does a low LTV guarantee a lender won't lose money?
No. A low LTV reduces the chance of loss but doesn't eliminate it: valuations can be wrong, property values can fall, foreclosure can be slow and costly, and documentation problems can delay recovery.
This article is for educational purposes only and is not investment, legal, or tax advice. It describes general characteristics of real estate debt investments; individual investments differ, and all involve risk, including the possible loss of principal. Essential Investment Group, LLC is not a registered investment advisor, broker-dealer, or bank. Any offer of securities in Essential Income Fund I, LLC is made only through its Private Placement Memorandum to verified accredited investors under Rule 506(c) of Regulation D.