LTC: Loan-to-Cost Ratio in Relation to HUD 221(d)(4) Loans

Loan-to-Cost Ratio for FHA Multifamily Loans 

When looking at traditional, single-family residential loans, loan-to-value ratio (LTV) is often one of the most important factors to examine. However, when we look at HUD multifamily construction loans, like the HUD 221(d)(4) loan, and other similar types of financing, loan-to-cost ratio (LTC) also becomes an important factor.

The Difference Between LTV and LTC for Multifamily Loans

While LTV factors in the value of the property, the LTC only factors in the actual cost of the property. LTC is designed to help lenders, developers, and other stakeholders determine the ratio of debt relative to the cost of acquiring the property in question. The formula for calculating LTC looks like this: 

LTC Ratio = Loan Amount / Total Cost

For example, if a multifamily developer is buying a property for $2 million and the property is worth $3 million, and is attempting to get a loan for $1.5 million, the LTC ratio is: 

$1.5 million/$2 million = 75% LTC

Conversely, the LTV ratio for the example property, which takes into account the property's value instead of its cost, would be: 

$1.5 million/$3 million = 50% LTV

For market rate projects, HUD multifamily construction loans allow for up to 85% loan-to-cost, making them a very attractive option for developers who want to preserve their cash. 

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