Key takeaways
- LTC = loan ÷ (purchase price + renovation or construction budget).
- LTV = loan ÷ current (as-is) value. Loan-to-ARV = loan ÷ after-repair value.
- Lenders apply more than one test and lend the lowest result.
- Knowing which test binds tells you which lever to pull: price, budget or value.
Loan-to-cost (LTC)
LTC measures how much of your total project cost the lender is financing. Total cost is usually the purchase price plus the renovation or construction budget; some lenders also include certain closing costs.
LTC = loan amount ÷ total project cost
A $400,000 purchase with a $100,000 renovation has a total cost of $500,000. A $425,000 loan is 85% LTC. The remaining 15%, $75,000, plus closing costs and reserves, is your equity in the deal.
Many lenders apply LTC in two parts: one percentage for the purchase and another for the renovation budget. That is why a term sheet may say something like "a percentage of purchase and a percentage of rehab" rather than one LTC figure.
Loan-to-value (LTV)
LTV compares the loan to the property's appraised value today, in its current condition. It is the standard measure on purchase and refinance loans for finished property. On a heavy renovation, as-is value can be well below the purchase price plus rehab, so LTV alone would limit the loan severely. That is why renovation lenders lean on LTC and ARV instead.
Loan-to-ARV
Loan-to-ARV compares the loan to the after-repair value: what the property should be worth when the work is done. It protects the lender if the project costs more than it will be worth.
How the tests work together
Same deal, three tests
Hypothetical limits| Purchase price | $400,000 |
| Renovation budget | $100,000 |
| After-repair value | $600,000 |
| Cost test: 85% of purchase + 100% of rehab | $440,000 |
| Value test: 70% of ARV | $420,000 |
| Loan (lower of the two) | $420,000 |
The value test binds here. Example limits only, not Wisdom Capital terms.
In this example, the ARV is the constraint. Negotiating the purchase price down would not increase the loan; a stronger, well-supported ARV would. If the ARV were $700,000, the cost test would bind instead, and the lever would become the price or the budget.
Why this matters when you make an offer
Before you commit to a price, run both tests. If the value test binds, check that your ARV is conservative, because a lower valuation reduces the loan dollar for dollar. If the cost test binds, focus on price and budget. Either way, the difference between the loan and your total cost, plus closing and carrying costs, is the cash you need. The hard money loan calculator shows which test binds for your deal.
LTC questions
What is LTC in real estate?
Loan-to-cost is the loan amount divided by the total project cost, usually the purchase price plus the renovation or construction budget.
What is the difference between LTC and LTV?
LTC is based on what the project costs. LTV is based on what the property is worth today. Renovation lenders use LTC and loan-to-ARV because as-is value does not reflect the planned improvements.
What LTC does Wisdom Capital offer?
Wisdom Capital lends up to 90% of the purchase price and up to 100% of hard (renovation) costs, on loans from $100,000 to $3,000,000. The total loan is also capped at 70% of after-repair value. On a $400,000 purchase with a $100,000 renovation and a $700,000 ARV, that is up to $460,000, or 92% of total cost. Terms are subject to underwriting and final approval.
