Short answer: LTV measures the loan against current property value. LTC measures it against total project cost. LTARV measures it against the finished, after-repair value. Construction and bridge lenders run all three and lend the lowest of the results. A quote of "80% LTC / 70% LTARV" is not two options — it's two ceilings, and the tighter one wins.
Why three ratios instead of one
A conventional mortgage lender only needs one number, because the property is finished and the value is knowable today. A construction lender is funding something that doesn't exist yet. They need to control three separate risks:
- How much of your own money is at stake → LTC
- What the collateral is worth today if you walk away → LTV
- Whether the finished project actually supports the debt → LTARV
Each ratio protects against a different failure mode. That's why they all get run.
LTV — Loan to Value
Loan amount ÷ current as-is appraised value
On a purchase, most lenders use the lower of purchase price or appraised value. That distinction matters. If you negotiate a $900K purchase on a property that appraises at $1.1M, you don't get to borrow against the $1.1M. The lender uses $900K, because an arm's-length purchase price is the best evidence of value there is.
The exception is a refinance, or a purchase where you've held the property long enough to establish a new basis — usually 6–12 months of seasoning. Below that seasoning threshold, expect purchase price to govern.
LTV is the binding constraint on land loans, raw acquisitions, and cash-out refinances. It's rarely binding on a heavy construction deal.
LTC — Loan to Cost
Loan amount ÷ total project cost
Total project cost means everything: purchase price (or your basis if you already own it), hard costs, soft costs, permits, architectural, carrying costs, and often the interest reserve.
LTC is the ratio that determines how much cash you write. At 80% LTC on a $2.5M project, the lender funds $2M and you're in for $500K plus closing costs.
Two things sponsors get wrong here:
- Not every cost counts. Lenders exclude items they consider soft or unverifiable — developer fees paid to yourself, marketing, sometimes a portion of soft costs. If the lender only recognizes $2.3M of your $2.5M budget, 80% LTC gives you $1.84M, not $2M. That $160K gap is real cash out of your pocket.
- Land equity counts differently. If you already own the land and it has appreciated, some lenders credit you for the current appraised value, others only for your original basis. On a lot you bought for $200K that's now worth $400K, that's a $200K swing in your equity contribution.
LTARV — Loan to After-Repair Value
Loan amount ÷ as-complete or as-stabilized appraised value
Also called LTC-Complete, ARV LTV, or as-complete LTV depending on the lender. This is the true risk ceiling. It answers: if we foreclose on a finished building, does the sale cover our loan?
For for-sale product like a condo conversion or spec homes, the ARV is the aggregate retail value of the units, sometimes discounted 5–10% for sell-out time. For rental product, the relevant number is the as-stabilized value at market occupancy — cap-rate driven, not comp driven.
Typical ceilings:
How they interact — a real example
Deal: buy a lot for $400K, build a single-family, sell it.
Purchase price: $400,000
- Hard costs: $850,000
- Soft costs + carry: $150,000
- Total cost: $1,400,000
- As-complete appraised value: $1,850,000
Lender quotes 80% LTC / 70% LTARV.
- LTC test: $1,400,000 × 80% = $1,120,000
- LTARV test: $1,850,000 × 70% = $1,295,000
The lower number governs. Loan = $1,120,000. You're in for $280,000 plus closing costs and any unfunded budget items.
Now change one input. Say the appraisal comes back at $1,550,000 instead of $1,850,000.
- LTC test: still $1,120,000
- LTARV test: $1,550,000 × 70% = $1,085,000
Now LTARV is binding and your loan drops by $35K. Your equity requirement goes up by the same amount, at a point in the process where you've already spent money on due diligence.
This is the single most common way a deal gets re-traded. The appraisal comes in light, the binding ratio flips, and the sponsor has to close a gap they didn't budget for.
The ratio that binds tells you what to fix
If LTC is binding, your problem is cost. The lender is comfortable with the value; they just won't fund more than a fixed share of your spend. Options: bring more equity, value-engineer, or find a lender with higher LTC tolerance for your experience level.
If LTARV is binding, your problem is value. The finished product doesn't support the debt. Options: better comps to support a higher appraisal, a scope change that adds real value, or a smaller loan.
If LTV is binding, you're overpaying, or you're trying to pull cash out of a property that doesn't support it.
Knowing which one binds is the difference between a productive conversation with a lender and just asking for more money.
What moves your ceilings
Lenders don't apply the same ratios to everyone. What raises your caps:
- Track record. Five completed projects of similar scope and size is the single biggest lever. First-timers see 65–70% LTC where an experienced sponsor sees 85%.
- Liquidity. Post-closing cash reserves reduce the lender's completion risk.
- Product type. Cookie-cutter residential in a liquid market prices better than a specialty asset.
- A GC with a real balance sheet and a fixed-price contract.
- Presubmission quality. A clean, complete package signals a sponsor who runs projects the same way.
FAQ
Which ratio matters most?
Whichever one is binding on your specific deal. On heavy construction it's usually LTC. On a high-margin flip or conversion it's often LTARV.
Does LTC include the interest reserve? Usually yes — the reserve is a project cost. Confirm it, because it affects both the numerator and denominator and can shift your proceeds by six figures on a larger deal.
Can I use a second mortgage or mezzanine to fill the gap? Sometimes, but most senior construction lenders prohibit subordinate debt outright. Preferred equity is the more common gap filler, and it's expensive — a 10% coupon plus a profit share often costs more than a 20% loan.
What's a good LTARV? As a sponsor, lower is safer. A deal that pencils at 75% LTARV has almost no cushion for a cost overrun or a soft market.
Not sure which ratio is squeezing your deal? Send the budget and the comps and we'll run the tests before you commit to a lender. Hub Financing arranges construction and bridge debt nationwide, compensated by lenders at closing with no fee to borrowers.