Loan to Cost – Not All Lenders calculate equally

[Stuart Udis]

I recently had a client come to me looking for assistance securing a construction loan. The client prioritized leverage and was adamant a hard money lender would offer the best terms citing the higher LTC. I frequently see the same rationale used in these forums. I believe there could be other benefits and reasons to use a hard money lender such as transactional ease (depending on lender) or perhaps even as a way of opening doors for borrowers who may not qualify for bank financing. However, when it comes to selecting a lender solely based on leverage it’s important to understand what’s included in each lender’s definition of loan to cost. By way of example, a lender who excludes settlement costs and requires the borrower to fund the interest reserve is vastly different than a lender who includes the settlement costs and an interest reserve that’s capitalized in the loan. Take a look at the following side by side analysis of the sources and uses prepared by two lenders, one who advertised their loan product at 80% LTC and the other at 90% LTC. The lesson here is to understand what each particular lender includes in their Loan to Cost definition because it can have a significant impact on the cash requirements.