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 85% LTV
Affordable properties can qualify 87% LTV
Properties with 90% of more low-income units can qualify with 90% LTV
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.