What is the Difference Between an LTC Loan And an LTV Loan For Builders

Investment planning the smart way requires understanding the differences between LTC and LTV loans. When you build homes to sell to customers, you need to understand all the ins and outs of financing projects the right way so that you can afford to build and then sell homes. No matter if you flip houses or build from the ground up, LTC and LTV need to be perfectly clear to you before you ever seek a loan.

LTC vs LTV doesn’t have to be confusing. Banking jargon can make a lot of basic concepts feel more complex than they are, and there is no area of banking that is more jargon-filled than lending. Being an informed builder is critical so that you can be sure that you can afford to invest in properties and sell them to customers for years to come. This guide will help you to understand these two critical loan types so that you can make smart choices when financing projects.

What is an LTC (Loan-To-Cost) Loan?

LTC loans are funded on the basis of the loan vs the total cost of the project. The LTC tells the lending institution what the total cost of the project is. The total cost includes the land, the building costs, and all the fees associated with the project.

LTC loans are calculated using a simple formula, which is LTC = Loan Amount ÷ Total Project Cost x 100%. As an example, if your project is $10 million and your loan covers $7.5 million, then the LTC is 75%.

A loan with a high LTC means that the loan will cover more of the project cost. Lenders have more skin in the game with these loans, which also means that they tend to come with higher interest rates and a tougher loan approval process. This is not always possible for every builder, but if you qualify, it can help you to fund a project rapidly.

Low LTV loans mean that your loan covers a smaller amount of the project costs. This lowers lender risk, which means that the loan is more likely to be approved and easier to get approved rapidly. This is ideal if you are on a short timeline and you don’t need much help to be able to get a project off the ground.

What is an LTV (Loan-To-Value) Loan?

LTV loans are funded based on the appraised property value. The LTV is calculated with the equation: LTV = Loan Amount ÷  Property Value x 100%. As an example, if your property is valued at $12 million when it is complete, and your loan is for $7.5 million, your LTV is 62.5%.

A high LTV loan also means that lenders have more invested in the loan. High LTV loans are just as hard to qualify for in most cases as high LTC loans. Low LTV loans are much easier to qualify for since the loan doesn’t have to shoulder as much risk.

Which Kind of Loan Will You Be Offered?

Ultimately, you don’t get to choose which kind of loan you are offered in most cases. The loan type is determined by the bank after it takes a look at the total picture of your risk profile. Your business credit and the property value, as well as the cost of the build or construction needs, are all part of the risk and cost profile for the bank.

The more conservative ratio is always the one that is offered to you as the builder. This protects the bank and ensures that you take on your fair share of the risk for the project. As always, the smaller the loan that you need, the more likely it will be to be approved.

For residential or multi-family projects, lenders will typically cap LTC at 70-80%. In commercial or other higher-risk project lending, the cap will be 60-75%. LTV limits for residential-type projects will also usually be 80%, while higher-risk projects will have an LTV cap of 60-80% depending on things like the complexity of the project, the current market, and other variables.

Can You Improve Your Position Before You Apply?

When you need to apply for a loan, you need to think about ways to make your approval odds more likely. In most cases, you need to be sure that you can fund more than the minimum amount of the project. You should also be sure that you offer up clear plans, a clear contract, and work with an experienced team to keep your projected construction time down.

Banks will always suggest you put more money down rather than less, and they will also want you to be sure that you reduce risk wherever you can. You can always shop around to various lenders as well to be sure that you can find a loan that works for your budget and your risk profile. Not every lender will approve you, and you will want to have some other options in mind so that you can be sure that you can find funding for your project without a big struggle.

LTV and LTC Are Both Part of the Builder Loan Process

Both LTV and LTC have a lot to do with your lending process when you are looking for a builder loan to allow you to build and sell homes. You need to know what both of these valuations have to do with the lending process so that you can be prepared to get the funding that you need without issue, so that your projects aren’t held up.

LTV and LTC are critical to the way that lenders view possible loan recipients. There are different ways of viewing the project that you need funding for, and the more you understand about them, the more likely it is that you will qualify for your loan. Educated business owners will always find the lending process to be much more attainable than those who don’t know much about how any of it works. This guide will allow you to be prepared for the way that value is calculated for the loans that you need to get for your business.