Hard money lenders don’t just look at credit scores—they focus on the numbers that define a real estate deal. Two key metrics, Loan-to-Cost (LTC) and Loan-to-Value (LTV), determine how much financing you can secure. While they serve different purposes, understanding both can help you maximize leverage and secure better loan terms. Understanding these metrics can help borrowers structure deals more effectively and secure the best financing options for their real estate investments.
What Is Loan-to-Cost (LTC)?
Loan-to-cost (LTC) measures the percentage of a loan relative to the total project cost, including the purchase price and renovation expenses. Hard money lenders use LTC to determine how much of the total investment they are willing to finance.
Loan To Cost Formula:
LTC = (Loan Amount ÷ Total Project Cost) × 100
For example, if an investor purchases a property for $200,000 and plans to spend $50,000 on renovations, the total project cost is $250,000. If a lender offers an 80% LTC, they will finance up to $200,000 (80% of $250,000), requiring the investor to cover the remaining $50,000.
Why LTC Matters in Hard Money Lending:
- Evaluates project feasibility – Ensures the borrower has adequate capital to complete the project.
- Focuses on the investor’s commitment – Lenders prefer borrowers who invest some of their own funds.
- Commonly used in fix-and-flip and value-add projects – Helps lenders assess financing for both the purchase and renovation costs.
What Is Loan-to-Value (LTV)?
Loan-to-Value (LTV) compares the loan amount to the property’s current or after-repair value (ARV) rather than its total cost. LTV helps lenders determine how much financing they are willing to provide based on the property’s expected market value.
Loan To Value Formula:
LTV = (Loan Amount ÷ Property Value [ARV or Current Value]) × 100
For example, if a property’s ARV is $300,000 and a lender offers a 70% LTV, they will finance up to $210,000, requiring the investor to cover the difference.
Why LTV Matters in Hard Money Lending:
- Assesses loan risk – A lower LTV reduces risk for lenders in case of default.
- Determines equity requirements – Investors may need more capital upfront if the LTV is low.
- Used for long-term financing or rental property investments – Lenders often evaluate LTV when refinancing into a conventional loan.
Which Metric Matters More in Hard Money Lending?
Most hard money lenders consider both LTC and LTV when underwriting a loan, but their priority depends on the loan type:
- For fix-and-flip investors: LTC is crucial since it accounts for both purchase and renovation costs.
- For buy-and-hold investors refinancing a property: LTV plays a bigger role, as the property’s appraised value determines loan eligibility.
- For new construction loans: LTC is the primary metric, but lenders may also consider the projected LTV based on the completed project.
Investors should evaluate both ratios when structuring deals to ensure they can meet lender requirements while maximizing leverage.
Let LJC Financial provide a Hard Money Lending Solution
Understanding LTC vs. LTV is essential for securing the right hard money loan for your real estate investment. LJC Financial helps Houston investors navigate these loan metrics, offering flexible financing solutions tailored to their needs.
Whether you’re flipping, refinancing, or building from the ground up, our experts can help you with a hard money loan that aligns with your investment goals. Contact LJC Financial today to discuss your options and get pre-approved!