LTV vs LTC Explained
When financing value-add real estate or construction projects, lenders evaluate risk using two distinct leverage metrics: Loan-to-Value (LTV) and Loan-to-Cost (LTC). Mixing them up will kill your deal.
Loan-to-Value (LTV)
LTV compares the loan amount to the appraised value of the property. This is the standard metric for stabilized properties (homes that are move-in ready or fully rented).
Example: You are buying a stabilized duplex appraised at $500,000. A lender offering 80% LTV will provide a maximum loan of $400,000. You must bring the $100,000 difference as a down payment.
Loan-to-Cost (LTC)
LTC compares the loan amount to the total cost of the project (Purchase Price + Rehab Budget). This metric is exclusively used by hard money lenders, construction lenders, and bridge lenders on distressed or value-add properties.
Example: You are buying a gut-rehab property for $200,000 and the contractor bids $100,000 for the rehab. Total Cost = $300,000. A hard money lender offering 85% LTC will lend a maximum of $255,000 toward the total project cost.
The Hard Money Structure (LTC + ARV LTV)
Most hard money or fix-and-flip lenders use both metrics simultaneously to cap their risk. A standard term sheet might read: "Up to 85% LTC, not to exceed 70% of ARV."
You only get the lesser of the two numbers.
| Project Metrics | Value |
|---|---|
| Purchase Price | $200,000 |
| Rehab Budget | $100,000 |
| Total Cost | $300,000 |
| After Repair Value (ARV) | $400,000 |
Applying the Constraints:
- Constraint 1 (85% LTC): $300,000 Total Cost × 0.85 = $255,000 Max Loan
- Constraint 2 (70% ARV): $400,000 ARV × 0.70 = $280,000 Max Loan
Result: The lender will only lend $255,000 because the LTC constraint is lower. You must bring the $45,000 difference (plus closing costs) as cash to close.