LTC: Loan-to-Cost Ratio

Loan-to-cost ratio (LTC ratio) is a ratio used in commercial mortgage financing and multifamily financing to determine the ratio of debt relative to the cost of acquiring the property. In the case of rehabilitation or construction, it relates to the total cost of the project as a whole.

It's important to remember that the value of the property has nothing to do with the LTC ratio; the value of the property is a subject matter for LTV. Commercial mortgage lenders use the LTC ratio as a factor to determine risk in a deal: the lower the leverage, the lower the risk. Conversely, higher leverage offers higher risk. The formula for the LTC ratio is:

LTC Ratio = Loan Amount / Total Cost

If a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTC ratio is 80%.

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