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Table of Contents

What is loan to value (LTV) and loan to cost (LTC)? Why it's probably the most important factor in getting approved for a construction loan besides your income and credit.

Banks are concerned with two important variables, loan to appraised value (LTV) and loan to cost (LTC).

If you were buying a home instead of building you would normally have to put up to 20% of the purchase price as a down payment. Since you're building a home your cash equity usually comes in the form of how much cash you've put down on your land or any pre-pays such as architect costs.

Cash equity is king when applying for a construction loan. For example, if you bought a $200,000 piece of land and you paid for the land free and clear you have a lot of cash equity.

With this much cash equity you will most likely not have to bring in any additional cash. Or if you purchased a piece of land over 12 months ago for $100,000 and its now worth $200,000, the bank will use the current seasoned value (12 months). In both cases you have brought $200,000 cash equity to the table.

Cash equity or down payment whatever you want to call is how the loan to cost is calculated. This variable can be more important than the appraised value as a matter of fact it directly affects if you need to bring in more cash to close and the finished appraised value of your new home. The important thing to remember is that most banks require 5 to 20% cash equity into most projects.

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