What are “LTC” and “LTV” and what do they mean for my fix and flip loan?

Estimated reading time: 5 minutes.

Post outline

What is LTC?
Sample LTC calculation
LTC implications
What is LTV?
What are LTAIV and LTARV?
Sample LTV calculation
Conclusion

What is LTC?

“LTC” and “LTV” are very frequently used terms in the fix and flip lending space, and as a borrower it is tremendously helpful for you to understand these concepts, particularly as they relate to your specific loan.

To start with, let’s discuss “LTC”.

“LTC” or “loan-to-cost’ is a measurement used by lenders to see how much debt they are providing relative to your total project cost.

Expressed mathematically, LTC is simply:

Loan amount/total project cost

When you get a fix and flip loan from a lender, that lender will often be restricted in the loan amount they can offer you by a couple of different metrics, and one of those is likely to be LTC.

The higher the LTC, the more leverage you get, and the more risk the lender takes on. The lower the LTC, the less leverage you get, and the less risk the lender takes on. As a result of this, sometimes the lender will charge you a premium for a higher LTC, or more leverage relative to your total project cost.

Sample LTC calculation

Fix and flip lenders will vary slightly in how they calculate total project costs, but most of them will count total project costs as the purchase price of the investment property plus the rehab or renovation amount.

For example,

Purchase price = 100k

Rehab amount = 50k

Total project cost = 150k or (100k + 50k)

To calculate the loan amount, we now need the LTC underwriting guideline from the lender.

Let’s suppose that our fix and flip lender is willing to offer you 80% LTC, or 80% loan-to-cost. This means that the lender is willing to loan you 80% of the 150k.

.80 * 150k = 120k

Your loan amount, based on the 80% LTC guideline from the fix and flip lender, is 120k.

Let’s take one more example and calculate what the LTC would be given the loan amount and the total project cost.

Purchase price = 150k

Rehab amount = 25k

Total project cost = 175k (150k + 25k)

Loan amount = 131.25k

To arrive at the LTC, we would take the loan amount and divide it by the total project cost, or 131.25k/175k.

Our LTC in this case would be 75%.

LTC implications

Many fix and flip lenders will require that you bring a portion of the total project costs to closing. Let’s take a look at how LTC really affects the amount of cash that you bring to closing.

To use another example, let’s say that you have the following numbers:

Purchase price = 200k

Rehab amount = 50k

Total project cost = 250k (200k + 50k)

Let’s say the fix and flip lender you are using offers you an LTC of 80%.

An 80% LTC means that the lender is going to fund 80% of 250k, or 200k of the project. In many cases, the lender will stipulate that you bring the remaining 20%, or 50k to closing. What does the effect of this look like?

Purchase price = 200k

The lender will fund 150k of this 200k purchase price and hold back the remaining 50k of their full loan amount. Given that the fix and flip lender is funding 150k of the purchase, that means you will need to bring 50k of the purchase to closing.

In addition, remember that most fix and flip lenders fund rehab budgets on a reimbursement basis, so you will need to float the first cost portion of the rehab.

What is LTV?

“LTV” or “loan-to-value” is a measurement used by lenders to see how much debt they are providing relative to the value of the subject property.

Expressed mathematically, LTV is simply:

Loan amount/property value

Much like LTC, LTV is a risk measurement for a lender, and lenders are generally limited by the LTV with regards to the maximum loan that they can provide you.

Also like the LTC, the higher your LTV, the greater loan amount you receive, and this means that the lender is taking on more risk. As a result, higher LTVs can sometimes mean that you pay more for your loan.

Unlike LTC, LTV actually changes through time. LTV can actually be considered an umbrella term; the two most common ways that LTV is used is LTAIV and LTARV.

What are LTAIV and LTARV?

LTAIV stands for “loan-to-as-is-value”.

Expressed mathematically, LTAIV is:

Loan amount/as-is value of the property

LTAIV can give lenders an idea of their risk at the outset of a fix and flip loan.

LTARV stands for “loan-to-after-repair-value”.

Expressed mathematically, LTARV is:

Loan amount/after-repair value of the property

LTARV can give lenders an idea of their ultimate fix and flip loan risk.

When a fix and flip lender says they are limited to a certain “LTV”, most of the time the lender is talking about “LTARV”.

Because of this, we’ll refer to the “LTARV” as the “LTV” in the next sections, as it’s what you’re most likely to hear when you go through the loan process.

Sample LTV calculation

Let’s say that you have the following project:

Purchase price: $350k

Rehab amount: $75k

ARV or after-repair value: $550k

Total loan amount: $361.25k or 85% LTC

To calculate the LTV in the above scenario, we would simply take the total loan amount, $361.25k, and divide it by the ARV, $550k.

$361.25k/$550k = 65.68% LTV

Let’s use one more example in which we figure out the maximum loan amount a fix and flip lender can offer us based on their LTV guideline.

Purchase price: $150k

Rehab amount: $40k

ARV: $250k

LTV: 60%

To get the maximum loan amount the lender can offer us based on their maximum LTV guideline, we would simply multiply the LTV, 60%, by the ARV, $250k.

.60 * $250k = $150k

Based on the lender’s maximum LTV guideline of 60%, we can expect the maximum loan amount they would offer to be $150k.

Conclusion

LTC, or loan-to-cost is a lender risk measurement, and it’s an important one to understand. LTC often affects not only your maximum loan amount on a given project, but also how much cash you need to bring to closing.

LTV, or loan-to-value is also a lender risk measurement, and is actually an umbrella term covering a range of values, LTAIV and LTARV being the two most commonly used. When most fix and flip lenders refer to LTV or an LTV max, they are generally talking about LTARV.

Both LTC and LTV affect the maximum loan amount you can expect to receive on your fix and flip loan, and can be calculated by the following equations:

LTC = loan amount/total project cost

LTV = loan amount/property value

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