Construction lending uses a different denominator from every other kind of real estate loan, and misreading it is the most common reason a sponsor’s (the developer’s or borrower’s) numbers and a lender’s numbers do not agree.
LTC, LTV and ARV are three different things
- LTC — loan to cost. The loan divided by the total cost to complete: land plus hard costs plus soft costs. This is the primary constraint on a construction facility.
- LTV — loan to value. The loan divided by the property's value today, as it stands. On a vacant lot that number is small and not very informative.
- ARV — after-repair or as-completed value. The appraised value the finished project is expected to support. Lenders usually test against this as a secondary constraint.
A construction loan is typically sized to the lesser of an LTC ceiling and an ARV ceiling. Hitting one does not get you past the other.
Key takeaways
- LTC is measured against total project cost — land, hard costs and soft costs — not against the finished value.
- Financing up to 90% LTC means the sponsor's equity is roughly 10% of total cost, and the lender will expect to see that equity actually in the deal.
What counts as “cost”
Land or acquisition cost, hard construction costs, and soft costs — architectural and engineering fees, permits and impact fees, insurance, interest reserve, and contingency. A budget that omits contingency and interest reserve is not a budget a lender will fund against; those two lines are what keep a project from stalling at 80% complete.
How draws work
A construction loan does not fund in a lump sum. Land or acquisition typically funds at close; construction funds are released in draws against verified progress. A typical cycle: the contractor submits a draw request against the schedule of values, an inspection confirms the work in place, lien releases are collected for the prior draw, and funds are released — often with a retainage held back until completion.
Two practical consequences. First, you carry each phase before you are reimbursed for it, so working capital matters as much as the loan. Second, clean documentation speeds draws; a sponsor whose draw packages are complete gets paid faster than one whose are not.
What a 90% LTC file actually needs
The top of the range is available, but it is earned. At US Lending & Company we fund up to 90% of loan-to-construction-cost and up to $75 million. A file that reaches the top of that range generally shows a sponsor with completed projects of comparable scope, a contractor with a real balance sheet, a permitted or near-permitted set of plans, a budget with genuine contingency, and an exit — sale or refinance — that the finished value supports comfortably.
The completion problem, and how a converting loan solves it
Traditional construction financing creates a cliff: the loan matures at completion, and the sponsor has to refinance exactly when the project is newest and least seasoned. Financing that converts into a permanent loan at conventional rates when construction completes removes that scramble, because the takeout was underwritten at the same time as the build.
This is not investment or construction-management advice. Every project is underwritten on its own facts — call (800) 943-1314 to talk through a specific budget.
A worked example, in plain numbers
For illustration only (hypothetical example): imagine a project with a total cost of $1,000,000: land, hard costs and soft costs together. At 80% LTC the loan would be $800,000 and the sponsor’s equity $200,000. At 90% LTC the loan would be $900,000 and the equity $100,000. The same project, the same value, a very different equity requirement. This is why the LTC ceiling is the number to understand first.
Then the lender tests the other side. If the finished project is expected to appraise at a value the loan does not fit comfortably inside, the ARV ceiling can reduce the loan below what LTC alone would allow. The loan is the lesser of the two.
Why equity has to be real
Lenders want to see the sponsor’s equity actually committed to the project, usually funded first or alongside the loan, rather than promised later. Cash in the deal is the best evidence that the sponsor will finish the job. Land owned free and clear, or purchased at a price well below its current value, can count toward that equity, but it is documented and appraised like everything else.
Common questions
Is LTC the same as LTV?
No. LTC divides the loan by the total cost to complete the project. LTV divides it by the property’s value. On a ground-up build the two can be far apart, especially at the start.
Why does my lender talk about both LTC and ARV?
Because the loan is sized to the lesser of the two. A strong LTC does not help if the finished value cannot support the loan, and the reverse is also true.
What makes a budget fundable?
Complete line items, a real contingency, an interest reserve, and a contractor who can perform. A budget with missing lines is a budget the lender has to guess at.
Published by the US Lending & Company underwriting desk. General information only — not legal, tax or investment advice.