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Loan-to-Cost Ratio (LTC)

June 5, 2022 • 2 min read

The LTC is used in commercial mortgage financing and multifamily financing. The Loan-to-Cost Ratio can help to determine the amount of debt relative to the cost of purchasing a property, or the total cost of a project as a whole.

Lenders use the LTC ratio as a method to determine the amount they are willing to issue to a borrower which will help them complete their project or finalize the purchase of their house.

Examples of Loan-to-Cost Ratio

There is a universal formula that is used to calculate LTC ratios.

Loan Amount / Total Cost = LTC

Here’s a practical example:

If a borrower wants to purchase a property of $750,000, and the loan amount requested is $450,000, the LTC ratio would then be 60%.

This puts the borrower at 60% equity in the purchase of the property and also gives them the motivation to complete the repayment of the loan or mortgage.

The Max Loan-to-Cost Ratio

Depending on the financial institution, lenders will typically arrange a maximum loan-to-ratio amount and maximum dollar amount.

For our example, the lender could either set an LTC of 60% or $450,000.

If there’s perhaps a chance that the buyer can make up the full amount of $450,000, while still being below 60%, they could then be required to use their personal savings or cash to complete the purchase.

The LTC is used as a way to determine the overall risk for the lender, not so much for the borrower. If a borrower has a lower LTC ratio, the leverage of risk involved is also a lot lower for the lender.

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