We believe the loan-to-value ratio should be based on the property’s purchase price in this case. The Interagency Guidelines for Real Estate Lending Policies generally require the loan-to-value ratio for a purchase loan to be calculated with the property value defined as “the lesser of the actual acquisition cost or the estimate of value.” The interagency guidelines do not include special rules for calculating the loan-to-value ratio in the case of a below-market purchase price established in a lease option.

In this case, the property’s “acquisition cost” is the purchase price as defined in the lease, since that amount is lower than the property’s estimate of value. Of course, your bank should document the appraised value of the property to support the exception to your loan-to-value limits.

For resources related to our guidance, please see:

• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Definitions (“Loan-to-value or loan-to-value ratio means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be included in determining the loan-to-value ratio. When mortgage insurance or collateral is used in the calculation of the loan-to-value ratio, and such credit enhancement is later released or replaced, the loan-to-value ratio should be recalculated.”)

• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Definitions (“Value means an opinion or estimate, set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property, prepared in accordance with the agency’s appraisal regulations and guidance. For loans to purchase an existing property, the term ‘value’ means the lesser of the actual acquisition cost or the estimate of value.”)

• Interagency Guidance on High Loan-to-Value Residential Real Estate Lending (October 12, 1999) (“The Guidelines permit institutions to grant or purchase loans with LTV ratios in excess of the supervisory LTV limits provided that such exceptions are supported by documentation maintained in the permanent credit file that clearly sets forth the relevant credit factors justifying the underwriting decisions.”)