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HUD 232 Glossary
Last updated on Feb 19, 2023
1 min read

What is Loan-to-Cost Ratio (LTC)?

Loan-to-cost ratio, or LTC, is a metric comparing the amount of a project’s financing to its construction costs.

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In this article:
  1. Loan-to-Cost Ratio in Relation to the HUD 232 Loan Program
  2. To learn more about HUD 232 financing , fill out the form below to speak to a HUD/FHA loan expert.
  3. Related Questions
  4. Get Financing

Loan-to-Cost Ratio in Relation to the HUD 232 Loan Program

Loan-to-cost ratio, or LTC, is a metric comparing the amount of a project’s financing to its construction costs. For HUD 232 construction loans, loan-to-cost ratio is one of the major measures of leverage. In contrast, HUD 232 acquisitions and refinance loans are more often assessed based on their loan-to-value ratio, or LTV.

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Related Questions

What is the definition of Loan-to-Cost Ratio (LTC)?

Loan-to-Cost Ratio (LTC) is a metric that compares the amount of financing a real estate construction project has to the cost it will take to build the project. In terms of HUD multifamily loans, LTC typically only affects HUD 221(d)(4) loans and HUD 232 loans, as these types of financing involve the new construction or substantial rehabilitation of multifamily and healthcare properties.

Loan to Cost (LTC) is a ratio used in commercial mortgage financing and multifamily financing to determine the ratio of debt relative to the cost of acquiring the property. Commercial mortgage lenders use the LTC ratio as a factor to determine risk in a deal: the lower the leverage, the lower the risk while higher leverage offers higher risk. LTC can be calculated by dividing the loan amount by the cost of the loan. For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTC ratio is 80%.

How is Loan-to-Cost Ratio (LTC) calculated?

Loan-to-Cost Ratio (LTC) is calculated by dividing the amount of the project loan by the total project cost. The formula for calculating an LTC ratio is:

LTC = Loan Amount ÷ Total Project Cost

To illustrate, consider a commercial property rehabilitation project that has a total cost of $4 million and a lender willing to finance $3 million. Simply divide the amount of the loan by the cost of the project, and the LTC ratio comes to 75%.

LTC = $3,000,000 ÷ 4,000,000 = 75%

What are the benefits of Loan-to-Cost Ratio (LTC)?

The Loan-to-Cost Ratio (LTC) is a valuable metric in commercial lending for value-add acquisitions such as ground-up construction or the acquisition of properties that require substantial rehabilitation. Lenders analyze the LTC ratio of a deal to understand the borrower’s debt in relation to the cost of a project. Unlike with the similar loan-to-value ratio metric, the value of a property has no effect on the LTC. Even so, similar to how LTV is used, the LTC is a valuable factor in the determination of the potential risk in a deal. The general rule of thumb is the lower the leverage, the lower the risk.

The benefits of Loan-to-Cost Ratio (LTC) include:

  • It is a valuable metric in commercial lending for value-add acquisitions such as ground-up construction or the acquisition of properties that require substantial rehabilitation.
  • It helps lenders understand the borrower’s debt in relation to the cost of a project.
  • It is a valuable factor in the determination of the potential risk in a deal.
  • The general rule of thumb is the lower the leverage, the lower the risk.

What are the risks associated with Loan-to-Cost Ratio (LTC)?

The risks associated with Loan-to-Cost Ratio (LTC) are related to the amount of leverage used in the financing. The higher the leverage, the higher the risk. For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTC ratio is 80%. This means that the borrower is taking on a higher risk than if the loan amount was lower. Additionally, if the property value decreases, the borrower may be unable to pay back the loan, resulting in a default.

Source: apartment.loans/posts/what-is-loan-to-cost-ltc and hud223a7.loan/glossary/what-is-loan-to-cost-ratio-ltc

What are the alternatives to Loan-to-Cost Ratio (LTC) for commercial real estate financing?

The alternatives to Loan-to-Cost Ratio (LTC) for commercial real estate financing include:

  • Debt Service Coverage Ratio (DSCR)
  • Loan-to-Value Ratio (LTV)
  • Debt Yield
  • Debt Coverage Ratio (DCR)

Lenders consider these metrics in order to determine the level of risk and the borrower’s leverage in a commercial real estate transaction.

In this article:
  1. Loan-to-Cost Ratio in Relation to the HUD 232 Loan Program
  2. To learn more about HUD 232 financing , fill out the form below to speak to a HUD/FHA loan expert.
  3. Related questions
  4. Get Financing
Categories
  • HUD 232 Loans
  • HUD 232/223(f) Loans
Tags
  • HUD 232 Loans
  • HUD Senior Housing Loans
  • FHA 232 Loan
  • HUD 232 Leverage
  • HUD 232 LTC

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