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How a Commercial Mortgage Lender Calculates Loan-to-Value

Commercial Mortgage
Posted on 
December 13, 2016

There are a number of factors that a small-balance commercial mortgage lender takes into consideration when determining the loan-to-value (LTV) percentage that they’re willing to offer a borrower. The LTV is the ratio of the loan amount to the value of the property, and is calculated using information about the borrower and the property.

Here’s a breakdown of the elements which can affect your borrower’s LTV:

The collateral:

The property itself is a crucial piece of the puzzle for any small-balance commercial mortgage lender. They type of property your borrower owns, the location of the building and how well your borrower maintains the collateral all enter into a lender’s calculations of the LTV. Make sure that your borrower understands how these factors will affect their loan amount.

The property’s cash flow:

Additionally, the cash flow of your borrower’s collateral is an important part of the LTV decision for lenders. Many small-balance commercial mortgage lenders use this metric to determine whether or not a borrower will be able to repay the loan, and if the building cash flows well, there’s a good chance that your lender will consider a higher LTV.

Your borrower’s credit:

The better your borrower’s credit scores and credit history, the more likely it is that they will be offered a higher LTV. Borrowers with higher credit scores and cleaner histories are seen as less risky because they’ve demonstrated that they have the ability to repay their debts.

Your borrower’s experience:

Generally speaking, lenders will consider higher LTVs for borrowers with experience running a particular type of property. For example, if your borrower is seeking financing for a multifamily building and is already running several successful properties, the lender will likely offer them a higher LTV than they would to a borrower seeking similar financing for the first time.

Brokers must consider the above factors when working with a borrower seeking a small-balance commercial mortgage. These elements of your borrower’s request all impact the amount of money a lender will offer them, and you should make sure that you and your borrower understand them. Remember to emphasize your borrower’s strengths and to account for any weaknesses in the above areas. The better your understanding of how a lender determines LTV, the more likely you are to close small-balance commercial mortgages that fit your borrowers’ needs.


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