Loan-to-Value Ratio (LTV)

Loan-to-value ratio compares the size of a loan with what the property is worth, as a percentage. Borrowing $375,000 against a $500,000 house puts LTV at 75%. For income property, the value in that ratio usually comes from an appraisal that capitalizes NOI, so a lower NOI can shrink the loan as well.

If an appraiser values the default house at $444,500 using its $28,892 of NOI and a 6.5% cap rate, 75% LTV allows about $333,400, not $375,000. The buyer has to cover the difference with more cash.

Income property lenders run a debt service coverage test too, and the loan is capped at whichever limit is lower. At a 1.25 coverage ratio and 7.25%, the default house supports only about $282,000 of debt, so here coverage sets the limit rather than LTV.