Glossary Term

Loan-to-Cost (LTC) Ratio

What is Loan-to-Cost (LTC) Ratio?

Loan-to-Cost (LTC) ratio is a financial metric used by lenders to assess the risk of a loan based on the total cost of a project. It measures the percentage of a project’s total costs that the lender is willing to finance. LTC is particularly relevant in construction, renovation, and fix-and-flip projects, helping both borrowers and lenders evaluate the financial structure of the deal.

How LTC is Calculated

The formula for calculating LTC is straightforward:

LTC = (Loan Amount ÷ Total Project Cost) × 100

For example, if a borrower is seeking a $300,000 loan for a project with total costs of $400,000, the LTC ratio would be:

LTC = ($300,000 ÷ $400,000) × 100 = 75%

This means the lender is financing 75% of the project costs, leaving the borrower to cover the remaining 25% through equity or other funding sources. The borrower's interest and other financing costs are not typically included in the project costs when calculating LTC.

Why LTC Matters

LTC is a critical metric for both borrowers and lenders:

  • For Lenders: LTC helps evaluate the borrower’s financial commitment to the project. Lower LTC ratios indicate that the borrower is contributing more equity, reducing the lender’s risk.
  • For Borrowers: Understanding LTC helps determine the amount of financing available and how much personal investment is required to complete the project.

    • Typical LTC Requirements

    LTC requirements vary depending on the type of project and the lender’s risk tolerance:

  • Renovation loans typically have LTC ratios of 80% to 90%, meaning lenders finance most of the project but require significant borrower equity. New construction loans typically have lower LTC ratios between 75% and 85%.
  • Riskier projects, such as speculative developments, may have lower LTC ratios to offset potential losses.

    • LTC vs. Loan-to-Value (LTV)

    While LTC focuses on the relationship between the loan amount and project costs, Loan-to-Value (LTV) ratio compares the loan amount to the appraised value of the property. Both metrics are important, but LTC is particularly useful for projects where costs and value may differ significantly, such as new construction or major renovations.

    Maximizing Your LTC Ratio

    Borrowers can improve their LTC ratio by:

  • Reducing project costs through efficient planning or negotiating better rates with contractors.
  • Providing additional collateral to reduce perceived risk.
  • Demonstrating strong financials or a proven track record with similar projects.

    • LTC and LYNK Capital

    At LYNK Capital, we work with borrowers to create customized lending solutions that align with their project goals and financial needs. Our flexible loan structures and competitive LTC ratios help ensure your project’s success. Contact us today to learn more about how our loans can support your next real estate venture.

     
     
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    *LYNK Capital Fund, L.P. operates as LYNK Investments, LLC in the state of Texas.
    LYNK Capital offers fix & flip loans, new construction loans, bridge loans, and DSCR rental loans to real estate investors.
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    Private Lending Glossary - Loan-to-Cost (LTC) Ratio