Supervisory Loan-to-Value Limits: Why Your Bank Caps the CRE Loan

You found the building. The appraisal came back clean. You expected to borrow most of the purchase price — and the bank offered 80% or 85% and stopped. That number is not your banker being conservative for sport. It traces to a set of federal supervisory loan-to-value limits that examiners expect regulated banks to follow on every loan secured by real estate.

Understanding where the ceiling comes from changes how you plan a deal. It tells you how much cash you need before you make an offer, when a second lender might legitimately fill the gap, and why pushing your bank past the line is harder than it looks.

What the LTV limit actually is

Loan-to-value is simple arithmetic: the loan amount divided by the value (or purchase price, whichever is lower) of the property securing it. An $800,000 loan against a $1,000,000 building is 80% LTV. The lower your LTV, the more of your own equity sits underneath the bank — a cushion that protects the lender if the property has to be sold.

After the savings-and-loan collapse of the late 1980s, Congress directed federal regulators to set real-estate lending standards. The result is the Interagency Guidelines for Real Estate Lending Policies, adopted jointly by the FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve. The guidelines live in regulation — for FDIC-supervised banks, in Appendix A to 12 CFR Part 365 — and they include a table of maximum LTV ratios by loan type.

The supervisory LTV table

These are the ceilings regulators expect banks to apply to new loans. They are not statutory caps on you as a borrower; they are supervisory expectations placed on the bank:

• Raw land — 65%. Undeveloped ground with no entitlements or improvements carries the lowest ceiling because it is the hardest collateral to sell.
• Land development — 75%. Land being prepared with utilities, grading, or infrastructure.
• Construction, commercial / multifamily / nonresidential — 80%. Ground-up commercial projects.
• Construction, 1-to-4 family residential — 85%.
• Improved property — 85%. A finished, income-producing commercial building — the category most owner-occupied and investment CRE purchases fall into.
• Owner-occupied 1-to-4 family and home equity. No fixed supervisory ceiling, but above 90% LTV the guidelines expect mortgage insurance or readily marketable collateral.

So the 80%–85% wall most small-business owners hit on a commercial building purchase is exactly where the table lands. Your banker is not inventing it.

Value versus purchase price — the lower-of rule

LTV is measured against the lesser of appraised value or actual purchase price. If you negotiate a building down to $900,000 but the appraisal says $1,000,000, the bank applies the 85% ceiling to the $900,000 you are paying, not the higher appraisal. You do not get to borrow against a bargain. This catches owners who assume a strong appraisal unlocks a bigger loan — it usually does not.

The ceiling runs against the lower of appraisal or price. Buying below market protects you; it does not raise your loan.

Banks can exceed the limit — but they have to pay for it

Here is the part worth knowing when you negotiate: the supervisory limits are not absolute. The guidelines explicitly allow banks to make loans above the LTV ceiling. What they require is that the bank identify each such loan as an exception, document the compensating factors, and report the total to its board.

And there is an aggregate ceiling on how many of these a bank can carry. Under the interagency guidelines, the total of loans exceeding the supervisory LTV limits should not exceed 100% of the bank's total capital. Within that, loans on properties other than 1-to-4 family residential — which is most commercial real estate — should not exceed 30% of total capital.

Translate that: your bank has a limited budget of over-the-line loans, and every exception it writes eats into a pool it has to answer for at exam time. That is why a banker who could technically stretch to 90% often will not. You are competing for a scarce slot, not just asking for a few more points.

How this shapes your deal

Once you know the ceiling is structural, you plan around it instead of fighting it:

• Budget the down payment early. On an improved commercial building at 85% LTV, you are bringing at least 15% in equity before closing costs. On raw land at 65%, it is 35%. Know which bucket your property is in before you make an offer.
• Look at an SBA structure for the gap. Government-guaranteed programs are built partly to get owner-occupants into real estate with less cash down than a conventional CRE loan requires. If the bank's conventional LTV ceiling is the obstacle, that is often the pivot point — see how the SBA 504 and 7(a) compare for owner-occupied real estate.
• Consider a seller note behind the bank. A seller carrying part of the price on a subordinate note can fill the equity gap without the bank breaching its LTV ceiling — but only if the bank consents and the note is properly subordinated.
• Don't expect the appraisal to be your lever. Because of the lower-of rule, a high appraisal rarely moves the loan on a purchase. It matters far more on a refinance.

Why the low-collateral categories sting

The 65% raw-land ceiling frustrates owners who see land as a safe asset. From the bank's seat it is the opposite: undeveloped land produces no income, can take years to sell, and swings hard in value. The LTV table is really a ranking of how fast each type of collateral can be converted to cash in a forced sale — the same logic that drives the discount in an orderly liquidation value on equipment. The harder the asset is to sell, the lower the bank is willing to lend against it.

LTV is a ceiling, not the whole decision

Clearing the LTV limit does not guarantee approval. It is one of several independent tests. The property still has to generate enough net operating income to service the debt — the debt-service-coverage ratio test — and the bank will still take liens, often reaching beyond the building itself into personal real estate and a personal guarantee. A deal can pass LTV and fail on cash flow, or pass both and still require collateral you did not expect to pledge.

Think of the LTV ceiling as the first gate: it decides the maximum size of the loan the property can support. Cash flow and collateral decide whether you get that loan at all.

The takeaway

When your bank caps a commercial real estate loan at 80% or 85%, it is applying a federal supervisory expectation, not an arbitrary preference. The bank can go higher, but each exception is documented, reported, and drawn from a capital-limited pool it defends at exam time. Plan your equity to the category your property falls in, measure LTV against the lower of price or appraisal, and treat any amount above the ceiling as something you have to earn with compensating strength — or fill with an SBA structure or a subordinated seller note. Knowing the line is coming lets you bring the right cash to the table instead of discovering the gap at closing.

Important: MidBank is not a bank, a financial institution, or a financial advisor. We are an advocate and ISO affiliate that connects businesses to vetted third-party providers. This article is general information published on November 13, 2026, not legal, tax, or financial advice — rules and rates change, and your situation is specific to you. Confirm details with the primary sources linked above and with a qualified tax or legal professional before acting.