LTV versus LTC: How Your Loan Type Can Affect Your Investment Strategy

Mortgage Basics – LTV versus LTC

LTV and LTC look similar, but the differences are huge.

First, what do those letters stand for?

LTV = Loan to Value

LTC = Loan to Cost

Lenders assigned a maximum loan based on a percentage of one of these figures.

For example, if a house is worth $100,000 and a lender has a maximum LTV of 75%, the most money you can borrow for that property is $75,000.

Sounds easy enough.

Things get tricky with LTC loans.

LTC loans will be based on the cost of the property, NOT the value.

For example, let’s assume you buy a house for $25,000 and spend $50,000 on renovations. Now, the house appraises for $100,000 (the value), like it did in the above example.

A lender with a maximum 75% LTC will ONLY loan based on the purchase price plus the renovation costs. In this example, that’s $75,000. So, 75% of $75,000 = $56,250.

Same house. Different loan limits.

If you are doing value-add projects, your goal is likely to pull your investment funds out and use it to buy another project.

This is especially common for new investors with limited cash.

A LTC loan will ALWAYS leave significant money sitting in the project. It’s unavoidable. You get no credit for the value that you add.

If you want to pull your investment out, or even a bit more than you invested, a LTV loan is the only type that will enable this.

Many banks only offer LTC loans. When you are interviewing lenders, be sure to ask whether they offer LTV or LTC.

It will make a big difference in your planning and portfolio growth.

Happy Investing!