If you’re building homes in Texas, the financing behind a build is just as important as pouring the slab. Knowing the difference between two key loan terms could make or break your deal.
The two loan terms that come up over and over again in construction lending are Loan-to-Cost (LTC) and Loan-to-Value (LTV). They sound similar, but what they measure and how lenders use them is very different.
In this guide, we’ll break down LTC vs. LTV, explain how they affect your next project, and help you figure out which metric to focus on.
What Is Loan-to-Cost (LTC)?
Loan-to-Cost (LTC) is a ratio that compares the amount of money a lender will provide to the actual cost of the project. That cost includes land acquisition, permits, construction materials, and labor — everything it takes to build a home.
Example:
If your total project cost is $1,000,000 and your lender agrees to fund $800,000, the LTC is 80%.
In the world of real estate, this number helps lenders determine how much “skin in the game” that you have, or how much money you have in a project. A lower LTC usually means you’re putting in more of your own capital, which lenders like because it shows commitment and reduces their risk.
Most lenders will state their loan terms by quoting something like “up to 85% LTC”. As a builder, you need to know that a higher LTC ratio means that you will receive a larger loan from a lender. Conversely, a lower LTC ratio means that you’ll receive a smaller loan from a lender. Most home builders that use private lenders are looking for a lender that will provide 85% LTC or higher. LTC’s of 90% or higher are more attractive and generally preferred by home builders because it means less capital is needed to be provided by the borrower. High LTC’s allow a builder to spread out their available cash across multiple projects, whereas lower LTC’s mean more cash is tied up. This is a crucial factor in the capital-intensive home building business.
What Is Loan-to-Value (LTV)?
Loan-to-Value (LTV) compares the loan amount to the estimated after-completion value (also known as the ARV — after repair value). It looks at what the property will be worth when it’s finished, not what it costs to build.
LTV tells a lender how much of a cushion or “margin of safety” that there is in a project. A 75% LTV means that there is a 25% cushion between the loan amount and the value of the project. If home prices change during the loan, then that cushion and margin of safety changes. Generally, lenders want that cushion to be as large as possible to provide a safe loan that avoids losses.
Example:
If the ARV of your finished project is $1,000,000 and you’re borrowing $750,000, your LTV is 75%.
Most lenders will state their LTV terms by quoting something like “up to 70% LTV”. As a builder, you need to know that a higher LTV ratio means that lenders are offering larger loans and more leverage. Conversely, a lower LTV ratio means a lender is offering smaller loans and less leverage. Most home builders that use private lenders are looking for a lender that will provide an LTV of 70% or higher. Lenders offering LTV’s of 70-75% are generally preferred by builders and it is rare to find many lenders going above 75% LTV.
LTC vs. LTV in Construction Loans: Why It Matters
When you’re comparing LTC vs LTV construction loans, it’s critical to understand what each number tells you and what it tells your lender.
- LTC is loan relative to cost. It’s about a borrower’s skin in the game, project cost and required equity or cash to close the loan.
- LTV is loan relative to value. It’s about a project’s future value, a builder’s potential profit and a lender’s margin of safety.
It is very important to understand that new construction lenders typically look at both LTC and LTV and require that both metrics not exceed their limits. In other words, your deal likely won’t be approved if only one of the two metrics is met. Both the LTC and LTV requirements must be satisfied.
What happens if only one of the two metrics is achieved? If the costs are too high relative to the after-completion value, then you might not receive the full amount of leverage that you’re looking for — or you may need to bring more capital to the table. Or, if the appraised value of a project is way below what is expected, then the loan may not be approved at all.
Which Metric Should You Focus On?
Here’s the short answer: focus on both. Both metrics will need to be met for loan approval. However, know when each metric matters.
- Focus on LTC while budgeting and estimating the amount of cash needed to close the loan.
- Focus on LTV when estimating the amount of profit that the project will provide and planning your exit (whether it’s a sale or refi).
Real-World Example
Let’s say you’re building a single family home in Dallas.
- Total cost to build: $1.2 million
- Projected ARV: $1.8 million
- Loan amount offered: $960,000
That puts your LTC at 80% and LTV at 53%.
In this case, most lender’s would see strong potential for appreciation and equity. The LTV of 53% is very low and below the typical limit of 70-75%. Also, the lender would look at the borrower’s commitment and exposure as high. The 80% LTC is low for a private lender and below the typical maximum of 85-90% LTC. A private lender like Avondale would likely move forward, especially if you’ve delivered similar projects before.
Final Take: LTC vs. LTV
In short, when it comes to LTC and LTV, the higher the number, the more attractive the lender is to home builders.
LTC is your cash metric. It tells you how much capital you need to close, how far your available cash will stretch, and how to plan your cash reserves. If you’re looking to maximize your cash reserves or the number of home building projects, look for private lenders with LTC maximums of 90% or higher.
LTV is your profitability metric and most relevant when estimating a project’s profitability that occurs at the end of the project — when you’re selling or refinancing. Comparable home values or home sales are your best friend when trying to prove value and maximize LTV.
For builders in Texas working on tight timelines, changing material costs, and evolving markets, loan-to-cost vs. loan-to-value isn’t just a technical distinction, it’s a financing strategy. Knowing your numbers will help you grow your home building business. It builds credibility. It shows you’re experienced, organized, and aware of your project’s risk profile.
Find a Lender With Attractive LTC and LTV Requirements
At Avondale Private Lending, we’ve funded over 800 deals across Texas, and we know how a lender’s requirement for LTC vs. LTV can significantly impact your plans and business. Currently, our LTC requirement is 93% or lower and our LTV requirement is 75% or lower. Both loan terms are higher than most other residential construction lenders in Texas.
Whether you’re building a home in Austin, Dallas-Fort Worth, or Houston, we structure private construction loan terms to help you acquire properties quickly, pay contractors easily and build homes efficiently.