What Are LTV Ratios & Why Do They Matter for Hard Money?
In this article, we’ll explain what LTV stands for, walk through how to calculate LTV, highlight why LTV is important, and show how hard money lenders use thresholds to manage risk.
What Is LTV? Understanding the Basics
What Does LTV Stand For?
LTV stands for loan-to-value ratio. Simply put, it’s your loan amount compared to the appraised value of the collateral property, expressed as a percentage.
Put another way, if a lender is willing to fund 70% of the property value, the LTV is 70%.
How to Calculate LTV
Here’s the formula:
LTV ratio = (Loan amount ÷ Property value)
For example, if a borrower wants to borrow $140,000 against a property appraised at $200,000, the LTV is (140,000 ÷ 200,000) = 0.70, or 70%.
This metric gives lenders and borrowers a quick gauge of how much equity is being put in by the borrower (i.e. 30% in that example).
Why Is LTV Important? The Stakes for Borrowers and Lenders
For Borrowers: Equity, Rates, and Cost Over Time
Borrowers should care about LTV because it has real consequences:
Lower down payment means higher risk premium. If you finance closer to the full appraised value (i.e. a higher LTV), lenders may charge a higher interest rate or stricter terms because the margin for error is thinner.
Cushion for market fluctuations. A lower LTV gives you a buffer if property values drop slightly: you retain equity.
Lifetime interest cost. The more you borrow (higher LTV), the more interest you pay over the term, assuming rate and term are equal.
While a borrower might prefer to push the LTV upward to preserve cash, that extra leverage comes with tradeoffs.
For Lenders: Risk, Protection, and Foreclosure Safety
Hard money lenders enforce maximum LTV thresholds to protect their capital:
Minimize loss in foreclosure. If the borrower defaults, the lender may foreclose and resell the property; lower LTV means the lender has a better chance of recovering the loan plus costs.
Mitigate valuation risk. Because appraisals and market values can be imperfect, lenders keep conservative maximums so minor appraisal errors or market dips don’t undermine their position.
Compensate for higher interest. Hard money loans typically carry interest rates much higher than conventional mortgages. The lower LTV protects the lender from overextending on high-cost risk loans.
Because of these factors, most hard money lenders cap LTVs in the 60–75% range — though some may be more conservative (50–60%) depending on property type, condition, location, or borrower.
Hard Money LTV: What Borrowers Should Know
Typical Hard Money LTV Ranges
While conventional mortgages might permit LTVs of 80–90%, hard money lenders are far more conservative. Most offer 65–75% of the property value. Some lenders push down to 50–60%, especially with riskier projects or properties requiring extensive rehab. Hard money lenders are sometimes willing to stretch their LTV acceptance if you’re a repeat borrower with multiple successful projects under your belt.
LTV vs ARV (After-Repair Value)
One nuance: many hard money lenders base their calculation on ARV, not the current value (especially if it’s a rehab [aka a fix and flip] or new construction project). ARV is the property's projected value after renovations. Thus, a lender might lend up to, say, 70% of ARV, but deducting rehab costs or using a blended current + ARV analysis.
So you might hear terms like “70% of ARV minus rehab costs.” That effectively reduces your usable LTV threshold when factoring in renovation budgets.
Why Hard Money LTV Caps Vary
Several factors drive where a particular hard money lender sets its ceiling:
Condition and liquidity of the property
Location and market volatility
Experience and track record of the borrower
Proximity of comparable sales
Risk of cost overruns or unsold inventory
If a project is riskier, the lender will ratchet down an acceptable hard money LTV to safeguard their downside.
How to Use LTV to Your Advantage
Negotiating a Better LTV
If you bring as much equity or down payment as possible (i.e., request a lower LTV), you signal lower risk which can help you negotiate lower rates or more favorable terms.
Accounting for Contingencies
Build a margin: assume some haircut in value or unexpected rehab cost overruns when projecting LTV eligibility. Don’t lean exactly up against the lender’s maximum.
Monitoring Value During the Project
If your project improves quicker than expected, you might refinance or negotiate adjustments because your LTV (based on ARV or appraised value) has improved.
Image by Miss Irine
Balance Smart Leverage and Real Protection with Capstone Capital Partners
For borrowers, managing your leverage and not stretching your LTV too far can save you on interest, reduce risk, and improve your terms. For lenders, capping a hard money LTV helps preserve their downside in uncertain markets.
If you’re considering a hard money loan and want a partner who understands conservative underwriting, market realities, and equity-driven structures, let’s talk. Capstone Capital’s hard money lending offers competitive packages tailored for bridges, flips, and turnaround projects.
Tell us a little bit about yourself and we’ll get in touch with you!
