In this article, we’re sharing the loan-to-cost meaning as it relates to real estate projects.
This article is part of our free series on credit basics, ranging from how to get a credit card with an ITIN number to answering questions like what increases loan balance.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Loan to Cost Meaning
- What Is the Loan to Cost Ratio?
- What Does LTC Mean in Commercial Real Estate?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
Loan to Cost Meaning
The loan-to-cost meaning, also known as LTC, is the percentage of financing that a financial institution is willing to offer in comparison to the total cost of completing a real estate project. LTC is calculated by dividing the total financing offered by the total cost of completing a project. In most cases, financial institutions are willing to offer between 60% and 80% LTC. But, this will depend on the risks associated with a project.
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What Is the Loan to Cost Ratio (LTC)?
The loan-to-cost ratio (LTC) reflects the total amount that a financial institution is willing to finance in comparison to the completion cost of a property or real estate project. Importantly, the loan-to-cost ratio does not consider the fair market value of the property at completion. Instead, it looks at the inputs required to deliver the project.
In other words, loan-to-cost is a reflection of a financial institution’s willingness to shoulder the interim financial risks of a real estate project prior to its completion. Of course, this is different from the more common consumer financing metric of loan-to-value, which we will compare below.
Loan to Cost (LTC) vs Loan to Value (LTV)
The main difference between loan-to-cost and loan-to-value is that the loan-to-cost ratio refers to the percentage of financing in comparison to the purchase (or completion) price of a real estate project. The loan-to-value ratio refers to the percentage of financing in comparison to the fair market value of the resulting real estate project after purchase (or completion).
What Does LTC Mean in Commercial Real Estate?
In commercial real estate, LTC means loan-to-cost ratio. This refers to the percentage that a financial institution is willing to finance in comparison to the total cost of a commercial real estate project. In most cases, the loan-to-cost ratio is between 60% and 80%. However, the lower the loan-to-cost ratio is, the more likely it is to receive support from financial institutions.
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Frequently Asked Questions
Below are three of the most common questions that we receive from people wondering about the meaning of loan to cost. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
What Are Typical Loan-to-Cost Ratios?
Loan-to-cost ratios tend to be no more than 80% of the total cost to purchase (or complete) a property. Irrespective of the projected fair market value. This is due to the risks associated with projects requiring further development and construction.
What Does 90% Loan to Cost Mean?
90% loan to cost means that the loan offered by a financial institution will be for 90% of the total cost of a property or project. Irrespective of the fair market or completed value of that property. In other words, if an individual purchases (or builds) a property for less than the market value of the property, the financing will be based on the price they pay to buy (or complete) the property rather than the price the home is considered to be worth in the end.
What Does 60% LTV Mean?
60% LTV means a 60% loan-to-value ratio where a financial institution is offering 60% of the total value of a property in the form of financing. The remaining 40% would be contributed by the individual purchasing the property in the form of a down payment. In most cases, a 40% down payment would result in a lower interest rate. This is because it is considerably higher than the average.
However, a 40% down payment may also be the minimum requirement if the applicant is a non-resident with no existing credit history in the country where the mortgage is being sourced. In these cases, the interest rate may actually be considerably higher than the average rate offered to local residents with a much lower down payment amount.
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