What Does It Mean?
Loan-To-Cost (LTC) is a measure of how much money the borrower has actually contributed to the project (in terms of the overall project cost) compared to the amount of the loan. LTC is used in conjunction with Loan-To-Value (LTV) to determine the overall risk of a loan. LTC is used extensively in renovation and construction lending where the ending value of the property may be very different from the acquisition cost at closing.
How Is LTC Calculated?
As an example, consider a property purchased for $100,000 with an estimated renovation budget of $50,000. The total cost of the project (acquisition cost plus renovation budget) is $150,000, so a lender that requires a maximum LTC of 90% would loan you no more than $135,000.
$135,000 / $150,000 = 90%
How Does It Affect My Hard Money Loan?
Your LTC will be used in conjunction with LTV to determine how much money you will be allowed to borrow. LTC guidelines help lenders ensure that borrowers have an acceptable amount of “skin in the game” and that the lender isn’t taking excessive risk by lending to borrowers with little money to lose. Similarly to LTV, loans with higher LTCs may cost more, both in interest rate and origination points. Loans with higher LTCs are typically riskier transactions for your lender, so your lender may require higher returns in exchange for this risk.