What is meant by LTV limits in loan covenants?

LTV limits in loan covenants refer specifically to limits on the loan-to-value ratio. The loan-to-value ratio is a financial term used to express the ratio of a loan to the value of an asset purchased. In the context of real estate finance, it measures the amount of financing being used to purchase a property compared to the value of that property.

Setting LTV limits is crucial as it helps lenders manage risk. A lower LTV ratio indicates that there is a larger equity cushion in the property, reducing the risk to the lender in case of default or market fluctuations. When the ratio exceeds established limits, it may trigger certain restrictive clauses in the loan agreement, potentially leading to higher interest rates or the requirement of additional guarantees.

While other choices mention concepts relevant to loan agreements and financing, they do not accurately capture the specific focus of LTV limits. For example, cash availability, total debt of a borrower, and equity distribution pertain to other aspects of a borrower's financial health and covenants but do not denote the loan-to-value relationship.