In real estate and construction financing, two numbers drive how much lenders will lend: Loan-to-Cost (LTC) and Loan-to-Value (LTV). Knowing the difference is key to smart investment planning.
But here’s the catch—you don’t get to choose which one the bank uses. They’ll go with the lower number. That’s how your loan ends up capped below expectations. Suddenly, you’re short by millions in cash, and the deal falls apart.
Whether you’re building new, flipping, or scaling a portfolio, knowing the difference between LTC and LTV can save your project and your deal. Get them right, and you’ll plan smarter, budget tighter, and build smoother. Get them wrong, and you’re losing out on the deal of a lifetime.
What Is Loan-to-Cost (LTC)?
Definition and Formula
LTC tells you how much of your project’s total cost—land, build, and fees—is financed by your lender. It’s your snapshot of how much you’re borrowing and how much you’ll need to make up the difference.
LTC = Loan Amount ÷ Total Project Cost x 100%
Sample LTC Calculation
Say your project costs $10 million and the loan covers $7.5M—that’s a 75% LTC. You’ll need to provide the remaining 25% ($2.5M) through equity or other funding.
What Is Loan-to-Value (LTV)?
Definition and Formula
LTV compares your loan to the current appraised value of a property.
LTV = Loan Amount ÷ Property Value x 100%
Sample LTV Calculation
Now, say that same project we talked about above is valued at $12 million when it’s finished, and the loan is still $7.5M —that’s a 62.5% LTV. You’re now responsible for the remaining 37.5% ($4.5M).
Why You Don’t Get to Pick: How Banks Decide Between LTC and LTV
Banks don’t ask you which ratio you’d like them to use. They run both, then they size your loan to whichever produces the lower number.
- LTC = Loan vs. project cost
- LTV = Loan vs. property value
The more conservative ratio always wins. That protects the bank and leaves you covering the gap.
Example:
- Project cost: $10M
- Loan request: $7.5M
- Appraised value: $12M
- LTC = 75%
- LTV = 62.5%
Although you may have budgeted for 75% LTC, the bank uses the more conservative 62.5% LTV. Suddenly, you’re short on cash at closing. Where do you find it? Translation: you need more cash at the table or your deal stalls.
How LTC and LTV Hit Your Wallet
LTC and LTV decide one thing fast—how much you borrow and how much you need to cough up. They set your down payment, sway your interest rate, and can make or break your approval.
Impact on Loan Amount and Down Payment
- High LTCs and LTVs mean the loan covers a larger portion of the project costs or the property value, so you put less money down upfront. Because lenders have more skin in the game, you can get hit with higher interest rates or tougher loan approvals.
- Low LTCs and LTVs mean the loan covers a smaller portion of the project costs or the property value, so you put more money down. This lowers the lender’s risk, which can get you better interest rates and quicker loan approvals.
Which Metric Matters More for Builders?
Both metrics have value for builders and lenders. Construction loan amounts aren’t based on just one factor—they’re a balancing act. Lenders check costs, property value, and income, and the most cautious number usually sets the loan.
How These Ratios Affect Your Financing Strategy
Understanding Loan Limits by Project Type
LTC Limits
For residential or multifamily construction projects, lenders typically cap LTC between 70% and 80%. This means you will have to put down a 20% to 30% down payment.
In commercial or higher-risk developments, LTC limits are often lower, ranging from 60% to 75%, so you’d have to cover 25% to 40% with your own capital.
LTV Limits
For residential or commercial acquisitions, the typical LTV limit is up to 80%. For construction loans, LTV limits tend to fall between 60% and 80%, depending on project complexity, market, and stabilization.
LTC vs. LTV: How to Improve Your Position Before Applying
Take the guesswork out of the loan application process. Here’s how to win over lenders in three steps:
- Make your project more secure with clear plans, contracts, and an experienced team.
- Work with a good appraiser to maximize as-complete/stabilized values.
- Highlight your construction track record. Borrowers with experience are more likely to secure favorable LTV terms.
Banks also typically suggest you put more money down to boost your approval chances. They play it safe, sticking to strict LTC and LTV limits—meaning you have to dig deeper in your pockets.
Want a better way? Consider alternative lenders. They’re flexible, letting you borrow more and put less down, so you don’t tie all your money up on one deal. It’s faster funding with fewer hurdles.
Grow Your Business With Sound Capital
Don’t let banks’ LTC and LTV caps strangle your growth.
At Sound Capital, we think differently from banks. We don’t hide behind whichever ratio cuts your loan the most. We structure deals to keep your cash free and your projects moving with higher leverage, interest reserves, and faster draws.
Request a term sheet today to start building faster with less cash stuck in the dirt.
