What Is a Loan-to-Cost Ratio? How Lenders Use LTC, LTV and ARV
Loan-to-cost divides the loan by the total project cost. Here is how it differs from loan-to-value and after-repair value, with a worked example.
Why it matters
- Loan-to-cost (LTC) is the loan amount divided by the total project cost, usually purchase price plus renovation or construction budget.
- Loan-to-value (LTV) compares the loan to the property's appraised value, and loan-to-after-repair-value (LTARV) compares it to the estimated value once work is done.
- Federal bank guidelines cap construction loans at 80% to 85% of value and say disbursements should not exceed actual construction outlays, a cost test similar to LTC.
Explainer: background on how this part of the market works.
A loan-to-cost ratio, or LTC, is the loan amount divided by the total cost of a project, usually the purchase price plus the renovation or construction budget. A $340,000 loan on a project that costs $400,000 has an LTC of 85%.
Lenders on fix-and-flip, bridge and ground-up construction loans use LTC alongside two value-based tests. Together they answer one question: how much of the project is the borrower paying for, and how much cushion does the collateral provide?
LTC vs. LTV vs. ARV: what is the difference?
| Ratio | Formula | What it measures |
|---|---|---|
| Loan-to-cost (LTC) | Loan ÷ (purchase price + rehab or construction budget) | How much of the project the lender funds; the rest is borrower equity |
| Loan-to-value (LTV) | Loan ÷ current appraised value | Collateral cushion today |
| Loan-to-after-repair value (LTARV) | Loan ÷ estimated value after work is done | Collateral cushion once the project is finished |
LTC measures the borrower's skin in the game. LTV and LTARV measure the collateral. A loan can pass one test and fail another, which is why many lenders size the loan to the lowest of the results.
A worked example
The figures below are illustrative, not market quotes.
| Item | Amount |
|---|---|
| Purchase price | $300,000 |
| Renovation budget | $100,000 |
| Total project cost | $400,000 |
| Estimated after-repair value | $550,000 |
| Loan amount | $340,000 |
- LTC: $340,000 ÷ $400,000 = 85%. The borrower funds the other $60,000.
- LTARV: $340,000 ÷ $550,000 = about 61.8%.
- LTV on the purchase: $340,000 ÷ $300,000 = about 113%. The loan is larger than the property's as-is value because part of it is a renovation holdback that is released only as work is completed.
That last number is why rehab lenders lean on LTC and after-repair value rather than as-is LTV. The holdback only creates collateral if the money goes into the property, which is why the construction draw process matters so much.
How do bank regulators treat cost and value?
Bank regulators publish interagency real estate lending guidelines; the FDIC's version, for the banks it supervises, is Appendix A to 12 CFR Part 365. The guidelines set supervisory loan-to-value limits that a bank's internal limits "should not exceed":
| Loan category | Supervisory LTV limit |
|---|---|
| Raw land | 65% |
| Land development | 75% |
| Construction: commercial, multifamily and other nonresidential | 80% |
| Construction: 1- to 4-family residential | 85% |
| Improved property | 85% |
Source: 12 CFR Part 365, Appendix A.
The guidelines also build in a cost test. For a loan to purchase an existing property, "value" means "the lesser of the actual acquisition cost or the estimate of value." For loans that fund several phases of a project, "loan disbursements should not exceed actual development or construction outlays."
Banks can make loans above these limits, but the guidelines say the total of such loans should not exceed 100% of total capital, and those on commercial, multifamily and other non-1-to-4 family properties should not exceed 30%. The guidelines are written for federally insured banks, not for non-bank private lenders, which set their own limits.
Why LTC matters more when rates are high
When financing costs rise, interest reserves and carrying costs eat into a project's budget, and takeout loans can shrink, as we explain in our guide to how DSCR loans are sized. A loan sized only on after-repair value can leave a borrower with little cash in the deal. LTC keeps that equity visible. For current benchmark rates, see our rates and data page, and find more underwriting coverage in our hard money section.
Sources
- Electronic Code of Federal Regulations, 12 CFR Part 365, Real Estate Lending Standards, including Appendix A, Interagency Guidelines for Real Estate Lending Policies
- Worked example figures are illustrative calculations, not market data. Loan terms and limits vary by lender.
