What is Loan to Purchase Price?
Loan to Purchase Price (LTPP) is a real estate underwriting ratio that compares the size of a requested loan and the property purchase price.
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How to Calculate Loan to Purchase Price (LTPP)
Loan to purchase price (LTPP) is a real estate underwriting metric that compares the size of a requested loan from a borrower and the purchase price of the property.
The loan to purchase price ratio (LTPP) is virtually identical to the loan to value ratio (LTV), aside from the denominator, the property purchase price.
Unlike the loan to value ratio (LTV), the loan to purchase price ratio (LTPP) divides the size of the loan by the original purchase price of the property, rather than the property’s current appraised fair value.
Therefore, the LTPP ratio is not impacted by fluctuations in the fair value of the property (and market pricing), i.e. the purchase price does not change regardless of market conditions and changes in the fair value of the property.
But similar to the loan to value (LTV) ratio, the loan to purchase price (LTPP) ratio is a method to gauge the riskiness of a proposed borrowing and is used as part of loan sizing by lenders.
Based on the risk profile of the borrower and the surrounding circumstances, such as the amount of financing requested, the lender will size the loan appropriately to reduce their downside risk and the potential to lose their original capital in the event of default.
The higher the loan to purchase price ratio (LTPP), the more credit risk is associated with the requested financing (and vice versa).
Loan to Purchase Price Formula (LTPP)
The formula to calculate the loan to purchase price (LTPP) is the ratio between the loan amount and the purchase price.
Where:
- Loan Amount → The requested loan amount by the borrower
- Purchase Price → The purchase price of the property on the original purchase date
