LTC, LTV & LtPP: Loan to Cost vs Loan to Value in Hard Money
Alphabet Soup
Dip your toes into the world of hard money loans and you’ll find yourself encountering more acronyms than a texting teenager. Which is not surprising, as there is much information to convey in a short order. Three of the most crucial acronyms you need to know in hard money are LTC, LTV, and LtPP. They come up when you are exploring terms on loan products, and you can’t afford to get them wrong. They represent different ratios lenders use to determine how much they are willing to loan you. Let’s break them down for your next real estate deal.
LTC, LTV, and LtPP
• LtPP (Loan to Purchase Price) is how much of the initial purchase cost of the property you can get as a loan. Since most hard money lenders like Backflip offer 100% of the rehab budget, the purchase is where the size of the loan really matters. But actually it’s not that simple…
• LTC (Loan to Cost) is the ratio that compares the loan amount to the Total Project Cost (which is defined as the sum of the Purchase Price and the Rehab Cost), in %. Note that Total Project Cost doesn’t include things like cost of financing.
• LTV (Loan to Value) is the amount of loan compared to the home’s After Repair Value, which is how much the house can be expected to sell for (again as a percentage). So, LTV can be more accurately described as LtARV.
How do you know the ARV? Well, the first place to look is the Analyzer in the Backflip app, but your hard money lender will do an expert determination on the ARV of the property by getting an appraisal and finding comps, referencing your Scope of Work to make sure the comps are on point.
Why These Ratios Matter to Lenders (and You)
Hard money lenders, like any financial institution, aim to minimize risk. These calculated ratios serve as tools for them to assess their potential for loss in case of a borrower default. If a deal exceeds the caps they set, the lender may decline the loan, or require the borrower to fund the difference. These ratios also serve as a safeguard for you, the investor: They force you to carefully evaluate your project’s financials and avoid going over your skis.
The Calculations
Let’s see how these ratios are calculated, using a flip where the property costs $200,000, the rehab is $50,000, and the ARV is $300,000.
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LtPP (Loan to Purchase Price)
Backflip offers a maximum LtPP of 80%+ on its Standard loan, and 90% on Double Double.
Example: If you purchase the property for $200,000 and the lender offers you an 80% LtPP loan, you would receive $160,000 ($200,000 x 80%) toward the purchase price. Since the rehab part of the loan covers 100% of the rehab, it may seem like you need to bring in just $40,000 of your own to cover this whole deal. But read on.
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LTC (Loan to Cost)
Backflip offers 81-85% LTC on its Standard loan, and up to 93% on Double Double.
Example: The property for $200,000 and the rehab is budgeted at $50,000, your total project cost is $250,000. So on a loan with an 83% LTC, your loan maxes out at $207,500 (250,000 x 83% = 207500).
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LTV (Loan to Value)
Backflip offers around 75% LTARV.
Example: If the ARV of your property is $300,000 and the lender caps its loans at 75% LTV, the loan amount could be up to $225,000 (300,000 x 0.75), which is already more than you’ve qualified for in both LTC and LtPP.
Putting It All Together
It’s important to know how these ratios interact. You might qualify for a loan amount on one ratio but exceed the limit on another. For instance, you might hit the ceiling of your LTC before you hit the ceiling of your LTARV. You’ll receive the lower of the two amounts.
To keep your contribution to a minimum and avoid hitting a cap too early, factor for every $100,000 in house purchase around $18,000 in renovation budget. And make sure your ARV is greater than 1.3333 x your Purchase Price + Rehab.
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In conclusion, LTC, LTV, and LtPP are essential ratios for real estate investors, help lenders assess risk and determine loan amounts. Lenders have different loan products with different maximum ratios. By understanding these ratios, and having an accurate ARV, you can navigate the complexities of real estate financing. Good luck!
For more on Backflip loans, click here.
