Two ratios decide how much a lender will give you on a value-add or construction deal: loan-to-cost and loan-to-value. They sound almost identical, and investors constantly confuse them.
The distinction matters because lenders apply both — and use whichever gives you the smaller loan. Understanding that rule tells you your down payment before you ever call a lender.
The Two Ratios
Loan-to-Value (LTV) measures the loan against the property’s value.
LTV = Loan Amount ÷ Property Value
On a stabilized purchase, “value” is the price or appraisal. On a project, it’s usually the After Repair Value or completed value — what the property will be worth when you’re done.
Loan-to-Cost (LTC) measures the loan against what you’re actually spending.
LTC = Loan Amount ÷ Total Project Cost
Total project cost is your all-in: purchase price plus renovation, or land plus construction.
LTV asks, “how much is it worth?” LTC asks, “how much are you putting in?” Different questions, often different answers.
The Rule That Governs Your Loan
On any deal where both apply, the lender calculates each and lends the lesser of the two. This protects them from two different risks — overpaying relative to value, and overborrowing relative to cost — and it’s non-negotiable.
So your maximum loan is never just “90% of cost” or “70% of value.” It’s whichever of those produces less.
The Standard Deal
A fix and flip. Purchase at $200,000, rehab $100,000 — a $300,000 cost basis. After Repair Value: $400,000. The lender allows up to 90% LTC and 70% LTV.
- 90% of cost: $300,000 × 0.90 = $270,000
- 70% of value: $400,000 × 0.70 = $280,000
The lesser is $270,000. That’s your loan. Your down payment is $30,000 — the 10% of cost the LTC limit didn’t cover.
Here, LTC binds. The cost limit is tighter than the value limit, so the value figure never comes into play.
The Great Deal
Now suppose you buy better. Purchase at $150,000, rehab $80,000 — a $230,000 cost basis. Same $400,000 ARV.
- 90% of cost: $230,000 × 0.90 = $207,000
- 70% of value: $400,000 × 0.70 = $280,000
The lesser is $207,000. The lender lends against your cost, not the value you captured by buying well.
This is the lesson that frustrates investors, so sit with it: buying below market doesn’t get you a bigger loan. Your $170,000 of built-in value (the gap between $230,000 cost and $400,000 ARV) is equity you created — but the LTC limit means the lender still bases the loan on what you spent.
The good news hiding in that: you needed less cash overall. A $23,000 down payment on a $230,000 project acquired something worth $400,000. The great deal rewards you with equity, not leverage — and equity is the thing worth having.
Why Lenders Cap Cost, Not Just Value
If lenders only used LTV, a borrower could inflate the ARV, borrow against a rosy projection, and put almost nothing in. The LTC limit forces you to have skin in the game measured against real dollars spent — not against an appraisal that hasn’t been tested by a sale.
And if they only used LTC, a borrower overpaying for a property could still borrow 90% of that inflated cost. The LTV limit prevents lending more than the finished property is worth.
Together, the two ratios protect against both failure modes. That’s why serious lenders always use both.
Where Each Ratio Shows Up
| Loan Type | Primary Limits |
|---|---|
| Stabilized purchase (DSCR) | LTV on purchase price / appraisal |
| Fix and flip | LTC on cost, LTV on ARV — lesser applies |
| Ground-up construction | LTC on total cost, LTV on completed value — lesser applies |
| Cash-out refinance | LTV on current appraised value |
| Bridge loan | LTV on current value |
On a straightforward DSCR purchase, LTV is usually the only ratio in play. On fix and flip and construction deals, both apply, and the lesser governs.
Using This to Your Advantage
- Know both numbers before you offer. Calculate your maximum loan under each limit and take the lower. That’s your real down payment.
- Don’t expect a great purchase to boost leverage. It boosts equity instead. Plan your cash for the LTC limit.
- Watch which ratio binds. If LTC binds, buying cheaper doesn’t reduce your percentage down. If LTV binds, a lower ARV shrinks your loan.
- Keep your ARV honest. Inflating it doesn’t help when LTC is the binding limit anyway, and it hurts when the appraisal corrects.
Run Your Deal Against Both
Whether it’s a flip or a build, model both ratios so you’re not surprised by the down payment. Our fix and flip and construction calculators apply these limits, so the loan amount they show reflects the real constraint.
When your numbers are set, apply now to see terms. Pre-qualification takes minutes with no hard credit pull.
All figures are illustrative and vary by lender, project, and market. LTC and LTV limits differ between lenders and loan programs. Nothing here is a commitment to lend or financial, tax, or legal advice.
