LTV: Loan-to-Value Ratio in Relation to HUD 221(d)(4) Loans
Loan-to-value ratio (or LTV) is an assessment of risk that lenders use to determine the viability of a loan. Loans with higher LTVs are considered riskier, and therefore often have higher interest rates. Lenders believe that borrowers who have loans with higher LTVs have a greater likelihood of defaulting on their mortgages because of the lack of equity within the property. However, a higher LTV allowance means that investors and developers can get a sizable loan with less cash down.
The Benefits of High LTV Multifamily Loans
Loan-to-value ratio (or LTV) is an assessment of risk that lenders use to determine the viability of a loan. Loans with higher LTVs are considered riskier, and therefore often have higher interest rates. Lenders believe that borrowers who have loans with higher LTVs have a greater likelihood of defaulting on their mortgages due to of the lack of equity in the property. However, a higher LTV allowance means that investors and developers can get a sizable loan with less cash down.
How LTV is Calculated
LTV can be calculated by using the formula below:
LTV Ratio = Loan Amount/Appraised Value of the Property
For example, if a developer wanted to get a loan for $3 million, and the property is worth $4 million, the LTV ratio would be 75%. However, LTV isn't the only factor that lenders look into when considering whether to approve a HUD multifamily construction loan.
Lenders Also Look into the Loan-to-Cost Ratio (LTC) of a Property
Like LTV, loan-to-cost ratio (LTC) is another financial metric that can help lenders determine the viability of development project. LTC can be calculated like this:
LTC Ratio = Loan Amount / Total Cost
If a developer wished to purchase a property for $3 million and the property is worth $4 million, and is attempting to get a loan for $2 million, the LTC would be:
$2 million/$3 million = 66.6% LTC
HUD 221(d)(4) Loans Allow Higher LTV Than Most Multifamily Loans
Unlike some other types of loans, HUD 221(d)(4) financing allows unusually high LTV ratios. That means:
Market rate properties can qualify with 87% LTV
Affordable properties and properties with 90% of more low-income units can qualify with 90% LTV
What is the maximum loan-to-value ratio for HUD 221(d)(4) loans?
The maximum loan-to-value ratio for HUD 221(d)(4) loans is 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units.
Source: apartment.loans/hud-221-d-4-loans and hud221d4.loan/hud-multifamily-construction-loans
What is the minimum loan-to-value ratio for HUD 221(d)(4) loans?
The minimum loan-to-value ratio for HUD 221(d)(4) loans is 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units.
Source: apartment.loans/hud-221-d-4-loans and hud221d4.loan/hud-multifamily-construction-loans
How does the loan-to-value ratio affect the interest rate of a HUD 221(d)(4) loan?
The loan-to-value ratio (LTV) does not directly affect the interest rate of a HUD 221(d)(4) loan. However, the LTV does affect the amount of loan proceeds that can be borrowed, which in turn affects the debt service coverage ratio (DSCR). The DSCR is a measure of a borrower's ability to repay a loan, and lenders use it to determine the interest rate of a loan. The higher the DSCR, the lower the interest rate.
According to HUD 221(d)(4) Loans, the loan amount will be the maximum proceeds subject to the lesser of:
- 85% LTC (or replacement cost), 85% of net operating income, or 1.20 DSCR for market rate properties
- 87% LTC (or replacement cost), 87% of net operating income, or 1.15 DSCR for affordable housing properties
- 90% LTC (or replacement cost), 90% of net operating income, or 1.11 DSCR for rental assistance properties
For more information on HUD 221(d)(4) loans, please visit Apartment Loans.
What is the difference between a loan-to-value ratio and a loan-to-cost ratio?
The Loan-to-Value Ratio (LTV) is a metric used to compare the amount of a loan to the value of the collateral used to secure the loan. It is primarily used as a risk mitigation metric in standard asset purchase and refinance transactions.
The Loan-to-Cost Ratio (LTC) is a metric comparing the amount of a project’s financing to its construction costs. It is used for ground-up developments or rehabilitation projects, and lenders typically use the value of the finished or stabilized property when assessing the LTC.
How does the loan-to-value ratio affect the amount of equity required for a HUD 221(d)(4) loan?
The loan-to-value ratio affects the amount of equity required for a HUD 221(d)(4) loan by determining the maximum loan amount that can be approved. According to Apartment Loans, the loan amount will be the maximum proceeds subject to the lesser of:
- 85% LTC (or replacement cost), 85% of net operating income, or 1.20 DSCR for market rate properties
- 87% LTC (or replacement cost), 87% of net operating income, or 1.15 DSCR for affordable housing properties
- 90% LTC (or replacement cost), 90% of net operating income, or 1.11 DSCR for rental assistance properties
According to HUD 221(d)(4) Loans, HUD 221(d)(4) financing allows unusually high LTV ratios. This means that market rate properties can qualify with 85% LTV, affordable properties can qualify with 87% LTV, and properties with 90% or more low-income units can qualify with 90% LTV.
What are the benefits of a low loan-to-value ratio for HUD 221(d)(4) loans?
The benefits of a low loan-to-value ratio for HUD 221(d)(4) loans are that they offer higher leverage than most other types of loans. For example, HUD 221(d)(4) financing offers up to 90% LTV for subsidized properties, up to 87% LTV for affordable properties, and up to 85% for market-rate properties. This is higher than CMBS loans, which offer a maximum of 80% LTV, and life company loans, which offer 75%, but more often only provide up to 65%. Freddie Mac and Fannie Mae typically only offer 70% to 75% for fully amortizing, fixed-rate loans. Additionally, HUD multifamily properties with a large amount of affordable/low-income units are eligible for LIHTCs, or low-income housing tax credits. Source and Source
It may also be helpful to remember that HUD multifamily properties with a large amount of affordable/low-income units (those set a specific percentage of a location's area median income) are also eligible for LIHTCs, or low-income housing tax credits.
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