The ability to repay a loan won't help you if you don't have the collateral to support it. The value of the collateral must exceed the loan value. This is known as the loan-to-value ratio. LTVs vary based on the type of collateral. Some banks lend 80 percent for owner-occupied real estate, but only 70 percent for investment properties. To calculate how much the collateral is worth to the lender, you need to know the appraised value, the loan amount and the maximum LTV set by the lender.
Contact the lender and ask what the advance rate is for your specific collateral. Owner-occupied real estate, for example, is typically 80 percent.
Obtain an appraisal. The cost will vary based on the type of collateral being appraised. A residential real estate appraisal may cost only a few hundred dollars, while a commercial real estate valuation can be several thousand. Note the appraised value of the property.
Note the value of any existing liens against the property. These amounts are included in the collateral calculation.
Multiply the value of the collateral by the LTV. For example, multiply $300,000 by 80 percent. The resulting figure of $240,000 represents the most money you can borrow using this particular collateral.
Subtract the value of any existing liens. If you owe $100,000 on a first lien, you are left with $140,000 available to borrow. This figure is the net lendable value, which represents the collateral worth for the purposes of the loan.
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