Guide to Loan Value

Getting the loan value advice to make a construction project viable
By Trisha Schulz

Lenders are in the business of providing loans to commercial construction developers, but they want to do so without the risk, and that's where loan value comes into play. Determining whether a construction project will retain enough value after it's built is key as both the lender and the developer want to come out ahead.

You don't have to be a loan value expert in order to perform the same math calculations that the lender will perform. But the lender will also factor in their own lending experience with the type of construction project you are proposing, and will look at your personal viability as well.

Consider the following loan value information:

1. A lower loan value is better for the lender if the loan winds up in foreclosure. The developer benefits by a higher loan-to-value ratio.

2. The lender will use financial history, credit scores, terms and length of the loan as considerations on the loan value, among other factors.

3. Market conditions can also affect loan value. In tough economic times, lenders may be forced to offer a less than favorable loan value rate, regardless of the project.

Action Steps

The best contacts and resources to help you get it done

Find loan value advice through online resources Investors and developers are usually treated with a better loan value than those purchasing real estate such as a home with a traditional 30-year mortgage. Lenders anticipate the investor or developer will expect a high return that can also come quickly. However, you'll want to learn all you can about loan value and all of the factors that go into it so you can effectively deal with lenders.

I recommend: RefiAdvisor can explain loan value further and also give you an idea of how your down payment affects the ratio. For real-life and simple examples of how loan value is calculated on commercial construction projects, check out C-Loans.

Calculate loan value information To form an accurate calculation of what your loan value may be, use the appraised value of the land, the down payment and what the loan amount will be. Simply dividing the loan amount by the value of the land and then converting that answer to a percentage gives you the loan-to-value ratio.

I recommend: See examples of how to calculate loan-to-value ratio and what percentage is considered favorable to lenders at Lending Tree. Use the five-step process at eHow to run the calculations yourself based on your down payment and other financial data.

Work with a lender to come up with a favorable loan value Ask for a lending consultant for loan value specifically if that's one of your top concerns. Make sure you are comfortable with the terms and conditions of the loan as well as the financial institution itself before signing on the dotted line.

I recommend: Review popular construction loan programs offered by Mortgage Capital & Investment. RIO Mortgage & Realty not only supplies loan value information for construction loans on their site but also interest rates and other financial details that will help you compare deals from other lenders.

Tips & Tactics

Helpful advice for making the most of this Guide

When it comes to loan value consulting, your lender may require you to pay private mortgage insurance if the loan value is more than 80%. This insurance protects them in instances of default. Be aware that higher loan values can also lead to higher interest rates. Some lenders even require another appraisal before approving a loan.