Loan to value (LTV)
Loan to value (LTV) is the percentage derived at loan origination by dividing an extension of credit by the total value of the property or properties securing or being improved by that credit, plus any readily marketable or other acceptable collateral. Interagency real estate lending guidelines treat LTV as a core underwriting and portfolio limit. Senior liens on the same collateral are included in the numerator when the ratio is calculated.
Loan to value on bank CRE desks
CRE desks use LTV with cash-flow tests such as debt service coverage ratio (DSCR) and debt yield when sizing permanent and bridge facilities on income-producing assets. OCC CRE guidance states that prudent policies set internal LTV limits that do not exceed supervisory loan-to-value (SLTV) ceilings, and that the appropriate LTV reflects cash-flow and value volatility of the property type. Higher-risk assets warrant more equity; more stable cash-flow profiles may support higher leverage within policy.
For acquisition, development and construction exposures, desks often pair LTV with loan to cost (LTC). Value for LTV may be as-is, as-complete or as-stabilised depending on the appraisal premise used for the credit decision. Multiphase facilities apply the SLTV category for the final phase funded by the loan, while disbursements remain limited to actual development or construction outlays.
Supervisory LTV limits and calculation
Under the Interagency Guidelines for Real Estate Lending Policies, institutions should establish internal LTV limits that do not exceed these supervisory ceilings:
- raw land: 65 percent
- land development: 75 percent
- commercial, multifamily and other nonresidential construction: 80 percent
- improved property: 85 percent
Aggregate loans above supervisory LTV limits should not exceed 100 percent of total capital, with a 30 percent of capital sub-limit for commercial, agricultural, multifamily and other non-one-to-four-family residential exposures. When mortgage insurance or other credit enhancement used in the LTV calculation is later released or replaced, the ratio should be recalculated. Cross-collateralised pools size maximum loan amount as the sum of each property's value, less senior liens, multiplied by the applicable LTV limit for that property.
LTV versus related leverage metrics
LTV is a collateral-value test. It differs from LTC, which divides credit by project cost rather than market value, and from debt yield, which divides net operating income by loan amount without reference to appraisal value. The European Systemic Risk Board monitors LTV at origination and current LTV for CRE stocks and flows, and treats loan-to-cost as the substitute indicator for property under development where market value is not yet the binding measure. Rising capitalisation rates can lift LTV even when cap rates and NOI fundamentals are unchanged, which is why desks stress value and coverage together.