When making non-recourse loans, the loan-to-value functions both as a security measure as well as a means of assessing a loan opportunity. The loan-to-value ratio (LTV) is one of the most common loan ratios used to quantify the perceived risk of a private loan.
How Is “Loan-to-Value” Used in Private Lending?
In private money lending, loan-to-value is the difference between the value of the security and the amount of the loan being funded. Often when a loan is rejected by private lenders it is because the amount requested exceeds the loan-to-value within the funds lending guidelines.
In the example below the borrower is requesting a loan for a property valued at $1M. In this case, the lender is only willing to fund an LTV of 70% of the asset ($700K). In real estate, loan to value is commonly expressed as a percentage.
Conversely, when discussing private money lending, the margin of safety is the difference between the loan amount and the value of the underlying property.
Brooktree’s lending guidelines include a maximum LTV of 70% for most loans, and 65% for construction loans.