The difference between LTC and LTV

What is the Difference Between LTC and LTV?

LTC (Loan-to-Cost) measures the ratio of a loan to the total cost of a project including purchase and development costs, while LTV (Loan-to-Value) assesses the loan amount against the current appraised value of the property. LTC is often used in construction or renovation projects to understand total project financing, whereas LTV is commonly applied in property purchases to evaluate mortgage risk. Both metrics help lenders and borrowers assess different aspects of financial risk.

Loan-to-Value (LTV)

  • LTV is a metric used to compare the amount of a mortgage loan to the appraised value of the property.
  • It is calculated by dividing the amount of the loan by the property's appraised value or purchase price, whichever is lower.
  • LTV is commonly used by lenders to assess the risk of a mortgage loan. A higher LTV ratio indicates more risk because it means the borrower is financing a larger portion of the property's value.
  • It is particularly relevant in the context of purchasing existing properties.

Loan-to-Cost (LTC)

  • LTC compares the amount of the loan to the total cost of the project, including the cost of purchasing the property and the costs associated with construction or renovation.
  • It is calculated by dividing the loan amount by the total project cost.
  • LTC is often used in the context of construction loans or significant rehabilitation projects.
  • It helps lenders assess the risk of lending for a project where the property’s value will potentially change due to the construction or improvements being made.

LTV is focused more on the value of the property as it stands, while LTC takes into account the total investment into the property, including construction or renovation costs. Both are important for understanding the financial risk and structure of real estate projects from the perspectives of both lenders and borrowers.

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