LTC’s Meaning in Business: 10 Critical Points for Baltimore & Beyond
If you’re getting a loan, you should know LTC’s meaning in business terms. The loan to cost ratio can greatly impact your loan approval chances, interest rates, and terms. Let’s break down exactly what the loan to cost ratio is, and why it matters to you, below.
Main Takeaways: LTC’s Meaning in Business Terms, Baltimore and Nationwide
- LTC’s meaning in business is a percentage of how your loan amount compares to the project’s overall cost. It measures how much financial stake the lender has in your loan equity.
- Lenders will use your loan to cost ratio to decide how risky it is to lend in your project. The lower your loan to cost ratio is, the easier it is to gain lender approval and better rates and terms.
- The LTC ratio compares your loan amount to the costs of developing your project, while LTV ratios compare your loan amount to your project’s value after it’s completed.
Table of Contents
- What is a Loan to Cost Ratio?
- Loan to Cost Meaning in Business, Explained
- What is a Good Loan to Cost Ratio?
- What is the Biggest Loan to Cost Ratio Lenders Allow?
- How to Calculate Your LTC Ratio
- Loan to Cost Ratio Examples
- Project Costs You Should Include in Your Calculations
- LTC vs. LTV: Loan to Cost Ratios vs. Loan to Value Ratios
- Which Ratio Matters More for Your Loan Prospects?
- What Other Factors Do Lenders Consider During the Approval Process?
What is a Loan to Cost Ratio?
The loan to cost ratio measures how your loan amount compares to your project’s overall cost in an easy-to-digest percentage. It’s typically used for real estate renovations or construction projects. As such, lenders use it to determine how risky lending to your project is, how much they should lend you, or if they should lend to you.
Next, our Baltimore hard money lenders will explain that last point in further detail.
Loan to Cost Meaning in Business, Explained
The loan to cost ratio helps lenders find how much risk your desired loan amount would bring to the lender. They use it in the approval process to decide how much to lend you—or whether they should lend to you at all.
Why Lenders Care About Loan to Cost Ratios
Think of it this way. The project cost represents your financial stake in your loan, while the proposed loan amount represents the lender’s liability. Then, the loan to cost ratio quantifies how much stake the lender covers out of the overall total equity.
If the project costs eclipse your loan amount, that means that more of the loan’s financial risk lies with you, as the borrower, than it does on the lender. In other words, if you default on the loan, it will be easier for the lender to recover financially.
However, if the loan to cost ratio is high, that’s another story. That means the lender’s equity in your loan is bigger than yours. In turn, the lender is put at disproportionate risk.
How Lenders Use LTC Ratios in Approval Processes
When lenders assess your desired loan amount’s viability, they’ll turn to your loan to cost ratio. They’ll use your LTC to help determine your:
- Loan Amount: If your LTC is too high, lenders may lessen your loan amount to lessen their risk. On the other hand, people with good LTCs may enjoy larger funding.
- Interest Rates and Terms: Again, a higher LTC may elicit higher interest rates and stricter terms, while lower LTCs can earn you better ones.
- Application Acceptance or Refusal: Since the LTC gauges a lender’s risk, sky-high ones may force some lenders to pass on you. On the contrary, lower ones can help get you through the door.
What is a Good Loan-to-Cost Ratio?
A good loan-to-cost ratio is usually under 75%.
As a rule, lower ratios look better to lenders. However, some may have higher or lower definitions of what constitutes a good ratio, so you should always ask.
What is the Biggest Loan to Cost Ratio Lenders Allow?
While lenders vary, many lenders restrict their LTC ratio to 80%. If you’re lucky, you may be able to hit a limit of 90%. So, you should keep your requested loan amount under this general range.
How to Calculate Your LTC Ratio
Calculating your loan to cost ratio is simple. You simply divide your desired loan amount by your cost. Visually, it looks like this:
Loan Amount ÷ Cost = Loan to Cost Ratio
Then, if you want to have your loan to cost ratio as a percentage, you just multiply it by 100. This would appear as:
(Loan Amount ÷ Cost) x 100 = Loan to Cost Ratio Percentage
Loan to Cost Ratio Examples
Example 1:
$30,000 loan amount ÷ $65,000 total project cost = 0.46
0.46 x 100 = 46%
Example 2:
$57,000 loan amount ÷ $80,000 total project cost = 0.71
0.71 x 100 = 71%
Example 3:
$22,000 loan amount x $65,000 total project cost = 0.34
0.34 x 100 = 34%
Project Costs You Should Include in Your Calculations
Here are some costs you should include to find your project’s overall cost:
Property purchase price- Renovation and construction costs, like materials, labor, structural repairs and changes, and exterior and interior improvements
- Costs of hiring architects, interior designers, structural engineers, and other parties who help you plan your project’s physical layout
- Insurance costs
- Inspection costs
- Permit and approval costs
- Legal fees
- Marketing costs
- Travel costs (if you need to travel to your project’s location)
LTC vs. LTV: Loan to Cost Ratios vs. Loan to Value Ratios
The loan to cost ratio compares the loan amount to how much a project will cost money to complete, well before it’s completed. However, loan to value ratios work differently. LTVs compare the loan amount to how much money a project could make money, and after it’s completed, for that matter.
In other words, LTV ratios and LTC ratios size up your loan amount to separate (but related!) aspects of a borrower’s project.
Still, LTV and LTC ratios have a few things in common. Namely, they each measure lender vs. borrower equity in your loan. Lower ratios are better for both. Most importantly, LTV and LTC ratios can both impact your loan eligibility, amount, interest rate, and terms.
Which Ratio Matters More for Your Loan Prospects?
Lenders may focus more on your loan to cost ratio if your project is currently in development. Or, if it’s ready and done, they may prioritize your loan to value ratio. Sometimes, though, lenders factor both in their considerations.
What Other Factors Do Lenders Consider During the Approval Process?
To attain loan approval and good rates, you should check the following boxes:
- A good credit score
- A consistent income and low debt-to-income (DTI) ratio
- A high-quality project (e.g., a promising property)
- A solid plan for completing and profiting from your project
- A good ARV (after-repair value)
- A proven investment history
These tips can help you get funding more easily.
Get Fast, Flexible Funding with Baltimore Hard Money Lenders
However, if learning about LTC’s impact on loan terms and rates scared you, there’s a solution. You could try hard money loans. These are real estate loans offered by private companies, not bureaucratic banks with strict, narrow, hard-set policies. As such, there is more room for negotiation.
Hard money lenders like us know every project has unique needs, goals, and restrictions. You need a lender who can meet you where you’re at. That’s why we collaborate with you to craft customizable, individualized terms that work for you.
Most importantly, upon approval, we can provide expedited delivery of your loans. Typically, you will start receiving funding within weeks or even days.
Best of all, if you’re an experienced real estate investor with good credit and collateral, we may be able to offer you a special deal. That’s right—we may offer you up to 100% funding, with no down payment required. So call us today to see how you can get the best loan deal possible.
