How lenders calculate LTV
Loan-to-value compares the size of the loan to the value of the collateral behind it. The formula is short, but the second half of it is where most of the surprises come from.
LTV = Loan Amount ÷ the lesser of appraised value or purchase price
On a purchase, a lender will not lend against a price you agreed to pay if an independent appraiser says the building is worth less. It uses whichever number is lower. On a refinance there is no purchase price in play, so the appraisal alone sets the ceiling — which is why refinance proceeds can swing sharply on a single valuation.
LTV is deliberately blind to income. It measures how much cushion a lender would have if it ever had to sell the property, not whether the property can make the payment. That second question belongs to debt service coverage and to debt yield, and all three tests run at the same time.
Where the maximum usually lands
There is no single commercial LTV ceiling the way there is in residential lending. The cap moves with how predictable the income is and how deep the resale market for that asset would be. Ranges commonly seen right now:
- Stabilized multifamily — typically the most generous, often around 70–80%, with agency programs sometimes reaching the top of that band for experienced sponsors.
- Industrial and net-leased retail — commonly 65–75%, depending on lease term remaining and tenant credit.
- Office and unanchored retail — commonly 55–70%, and tighter when a large share of leases roll inside the loan term.
- Hospitality — commonly 55–65%, because room revenue resets every night instead of being locked in by a lease.
- Special-purpose assets such as car washes, restaurants, bowling centers and marinas — often 50–65%, since the pool of buyers who could take the building off a lender's hands is thin.
Treat those as opening positions for a conversation, not as quotes. Sponsor experience, market, loan size and the day's credit appetite all move them.
Worked example: when the appraisal comes in low
You are under contract on a small industrial building at $2,400,000 and your lender has quoted a maximum of 70% LTV.
- Appraisal at $2,400,000 — loan is 70% × $2,400,000 = $1,680,000, and you bring $720,000.
- Appraisal at $2,250,000 — loan is 70% × $2,250,000 = $1,575,000, and you bring $825,000.
The seller is owed $2,400,000 either way. So a $150,000 gap between contract price and appraised value did not cost you $150,000 — it cost you $105,000, because the loan shrank by 70% of the gap and your equity absorbed the difference. Run the same shortfall at 60% LTV and the extra cash is $90,000; at 80% it is $120,000. The more leverage you were counting on, the more a soft appraisal hurts. Our LTV calculator will run those scenarios in a few seconds, and it is worth doing before your deposit goes hard rather than after.
What it means for you
Treat the quoted maximum LTV as one of three ceilings, not as the answer. A lender sizes the loan at the lowest of the LTV limit, the DSCR limit and the debt yield limit. On a low-cap-rate property in an expensive market the income tests usually bind first, and you will never reach the LTV cap you were quoted. On a higher-yielding property in a secondary market, LTV is frequently the one that stops you.
The practical move is to model your cash requirement at a valuation slightly below contract price before you commit, and to know which of the three tests is likely to bind. If you want that sized against real lender parameters instead of a rule of thumb, send us the deal and we will run it. The CRE loan requirements page covers what underwriting will ask you to produce.
What to watch for
- "Up to 75% LTV" is a ceiling, not an offer. Rate sheets quote the best case for the best borrower on the best asset. Your actual proceeds come out of the income tests as often as not.
- Seller credits can be deducted from value. Concessions that lower your effective price may also lower the number the lender is willing to lend against.
- Renovation dollars are usually outside the base. On a value-add purchase, LTV is measured against as-is value. Money you plan to put into the building is measured by loan-to-cost instead.
- Cash-out has its own, lower cap. Many lenders allow meaningfully less leverage on a cash-out than on a rate-and-term refinance of the same building.
- Appraisals go stale. A valuation from eight months ago may not be usable, and a re-appraisal in a moving market can change your loan amount late in the process, after you have spent real money on diligence.
What is a good LTV for a commercial real estate loan?
"Good" depends on the asset and on your goal. Most stabilized commercial purchases close somewhere in the 60–75% range, with multifamily at the higher end and special-purpose property lower. A lower LTV buys you better pricing, easier approval and more cushion if values soften; a higher LTV preserves cash for the next deal. There is no single correct answer, only a trade-off you should make deliberately.
What happens if the appraisal comes in below the purchase price?
The lender sizes the loan on the lower appraised value, and the difference lands on you as extra equity. On a 70% LTV loan, every $100,000 of appraisal shortfall costs you $70,000 more cash at closing. Your options are to renegotiate price with the seller, cover the gap yourself, order a rebuttal or second appraisal, or walk if your contract still allows it.
Is commercial LTV based on purchase price or appraised value?
On a purchase, lenders use whichever is lower. On a refinance there is no purchase price, so the appraisal controls — though some lenders apply a seasoning requirement and use your original purchase price if you have owned the property only a short time.
