Loan-to-cost (LTC)

How loan-to-cost works

LTC = total loan ÷ total project cost. For a fix-and-flip or construction loan, total cost is usually the purchase price (or land value) plus the approved budget for hard costs, and sometimes soft costs such as permits, architects and interest reserves. Lenders define the cost basis in their own guidelines, so the same project can show different LTCs at different lenders.

Many private lenders set two limits on the same loan: a maximum share of the purchase price and a maximum share of the rehab budget (released in draws), then cap the whole loan at a share of after-repair value.

Why it matters to a private lender

LTV tells you how much equity is in the property; LTC tells you how much of the borrower’s own money is in the deal. A borrower with real cash at risk is more likely to finish the project and less likely to walk away. Capital partners and loan buyers look at both ratios, and a loan with low LTC but an optimistic ARV deserves a closer look at the budget.

Example

Hypothetical. Purchase $300,000, rehab budget $100,000, total cost $400,000. The lender funds 90% of the purchase ($270,000) and 100% of the rehab ($100,000), a $370,000 loan. LTC is 92.5%, so the borrower brings $30,000 plus closing costs. If ARV is $560,000, the loan is about 66% of ARV.

Federal bank guidelines also expect construction disbursements not to exceed actual construction outlays, which is what a draw schedule enforces. See LTV vs LTC vs ARV.