Loan-To-Cost Ratio - LTC

HGTV hasn’t come around to offer us a TV show contract yet, but we sure do love our house-flipping business. Just like every other house flipper out there, we’re always looking for the worst house in the best neighborhood that we can fix up into something amazing…and amazingly profitable. But long before we set out the cookies and reel in the prospective buyers, we have to pay for the remodel. And if we don’t have enough cash on hand to, say, buy a $200,000 house and put $50,000 into it, we might consider taking out a loan.

When banks finance projects like our custom home remodels, one of the things they look at is the LTC, or loan-to-cost ratio. Basically, the LTC tells them how much of the total project they’re financing and, for the most part, they won’t agree to finance more than 80% of the total cost. Not only does this protect them a little bit if our project hits the skids, but it also ensures that we the borrower have some skin in the game. After all, even with a full 80% loan, we’re still on the hook for the other 20% right now, even before we start paying back what we’ve borrowed.

So, all that being said, if our estimated project cost is $250,000, the bank probably isn’t going to finance more than $200,000.

Look, we’ll prove it with math:

LTC = LA/PC

LA is our loan amount, and PC is our project cost. So if our PC is $250K and our loan amount is for $200K, we get this:

LTC = 200,000/250,000 = .8, or 80%

This 80% thing isn’t a hard and fast rule. If we’ve maybe got a questionable loan payment or credit history, we might not get approved for that much. The bank might decide it’s safer for them to only approve a loan with a 60% LTC. Or sometimes, if a bank decides to finance more of the project—like 90%, for example—we might end up paying higher interest rates to compensate for the risk, even if our credit score is perfect.