The two ratios
Loan to value is the loan divided by the value. Loan to cost is the loan divided by the cost. A lender on a purchase of a finished building looks mainly at value. A lender on construction looks at both, because the value of an unfinished building is a forecast and the cost is a budget.
The federal reference for value
The interagency real estate lending guidelines tell every bank to set its own loan to value limits, and say those limits should not exceed these supervisory ones.
| Loan category | Limit |
|---|---|
| Raw land | 65% |
| Land development | 75% |
| Construction: commercial, multifamily and other nonresidential | 80% |
| Construction: 1- to 4-family residential | 85% |
| Improved property | 85% |
| Owner-occupied 1- to 4-family and home equity | None set |
These are references, not ceilings on a single loan. A bank may make a loan above them when other credit factors support it, if it identifies those loans and reports them to its board. The guidelines say the total of such loans should not exceed 100 percent of the bank's total capital, and that commercial, agricultural, multifamily and other non-1-to-4 family loans within that total should not exceed 30 percent of total capital.
Three details change the answer. The limit applies to the property that secures the loan. A loan that funds more than one phase, such as land development and then construction, uses the limit for the final phase, and disbursements should not exceed actual development or construction cost. A loan secured by several properties is measured against the sum of their values, less senior liens.
For an owner-occupied home loan at 90 percent of value or more, the guidelines expect mortgage insurance or readily marketable collateral. That is a home loan, not a business loan, and it is here only because it is in the same table.
Where SBA sets a share instead
SBA 504 is built on cost, not value. The bank, called the third-party lender, provides 50 percent or more of the project financing, the development company provides up to 40 percent, and the borrower puts in at least 10 percent. A new business or a special purpose property raises the borrower's share to 15 percent, and both together raise it to 20 percent.
In the data here
HMDA records the combined loan to value as filed on multifamily loans, and the guides on this site show the middle value by loan size. Call reports give balances by kind of loan, not a loan to value for any one loan, and the SBA files carry none. For a deal you are working on, the lender's own policy sets the number, and the supervisory table above is the outer reference.
Terms used here
- Loan-to-value ratio (LTV): The loan amount divided by the value of the property securing it. A $700,000 loan on a property valued at $1,000,000 is 70 percent loan to value.
- Loan-to-cost ratio (LTC): The loan amount divided by the total cost of a project: the property plus all construction costs. It shows how much of the budget the lender funds.
- Supervisory LTV limits: Loan-to-value ceilings in the federal real estate lending guidelines, from 65 percent for raw land to 85 percent for improved property, that a bank's own limits should not exceed.
Sources
- 12 CFR part 365, Appendix A, Interagency Guidelines for Real Estate Lending Policies, Supervisory Loan-to-Value Limits (FDIC; the OCC handbook on commercial real estate lending prints the same limits), current as of .
- SBA SOP 50 10 8.1, Section C Chapter 1, 504 project financing (bank share of at least 50%), effective .
Next step: check the record
- Loan CompsAdd the LTV to a deal description and see which lenders have made loans like it. It is one of the optional inputs.
- Construction lendersBanks and credit unions that hold construction loans, with the size of each book.
Keep reading
- Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Estimate from your inputs. Not a quote or advice about which loan to take. Another tool: all calculators.