What is LTC?

What is LTC? LTC is an acronym for loan to cost. Loan to cost (LTC) is simple to calculate, it is the loan amount divided by total project cost. I calculate total project cost by adding the purchase price, closing costs, and the cost of construction. My hard money loan program allows me to fund up to 90% LTC. In reverse, that means that my borrowers need to come up with an investment of 15% of the project costs at closing as their “skin in the game”. Of course, I can’t just use this metric to size a hard money loan. I also have to look at loan to value (LTV) to make sure that my loan doesn’t exceed my target LTV metric.

I know that there are a lot of hard money lenders sizing a borrower’s down payment or investment requirement based on a % of purchase price (85%). I don’t see how that allows for an alignment of risk on a construction loan. Take for instance a single family new build. Who wants to lend at 85% of the land value? As a hard money lender I always need to consider the scenario where I need to foreclose.  Funding 85% on land gives me virtually no room for error factoring in the costs to sell and limited buyer pool. The same thing applies to a fix and flip where the construction budget isn’t a cosmetic rehab but a $200,000 gut rehab. More construction equals more risk, and that’s why I look at LTC vs LTPP when sizing my hard money loans.