The quick read: Loan-to-cost (LTC) on a construction loan is the loan commitment divided by the total project budget the lender accepts, and the practical question is what goes into that budget. Hard costs are the core of the budget. Soft costs, contingency and the interest reserve count when the lender approves them as budget lines; the OCC's Comptroller's Handbook (Version 2.0, March 2022) says the interest reserve "is typically funded via a budget line item in the construction loan." Land and developer fee are the lines to pin down with each lender: the OCC's handbook addresses both for bank loans, but no public, dated source states one market rule for private construction lenders. Two public rulebooks show the mechanics: HUD's Form HUD-92264 builds a replacement cost that adds a warranted land price to a development cost carrying interest, fees and a builder and sponsor profit line, and HUD Mortgagee Letter 2025-03 (January 8, 2025) sets the market-rate 221(d)(4) LTV/LTC ratio at 87 percent. For bank construction loans, the federal Interagency Guidelines also set an 80 percent supervisory loan-to-value limit.
What is the loan-to-cost formula on a construction loan?
Construction loan-to-cost is the total loan commitment divided by the total project cost the lender accepts into its budget, expressed as a percentage, and it is measured against the full budget rather than the amount drawn to date. The formula is simple; what changes between lenders is which lines they allow into the denominator.
LTC formula: loan commitment ÷ total accepted project cost × 100
LTV on the same loan: loan commitment ÷ appraised value × 100
Lender proceeds: capped by the lower of the loan the LTC cap allows and the loan the LTV cap allows
Federal bank guidance describes both tests. The OCC's Comptroller's Handbook on commercial real estate lending (Version 2.0, March 2022) says: "Prudent policies typically establish loan limits as a maximum percentage of cost (i.e., LTC) as well as market value (i.e., LTV) to ensure that the borrower contributes sufficient equity." For how LTC compares with LTV and after-repair value across loan types, see our LTV, LTC and ARV guide; for the one-line definition, see the LTC glossary entry. This article stays on one question: what goes into the "C".
Which cost lines count in the LTC denominator?
The LTC denominator on a construction loan is built from six recurring budget lines (land, hard costs, soft costs, contingency, interest reserve and developer fee), and each one is either counted at cost, counted at a credited value, capped, or left out. The table shows what public documents say about each line.
| Cost line | What it covers | What a public, dated document says | Question to ask each lender |
|---|---|---|---|
| Land | Purchase price, or a site you already own | Form HUD-92264 (form date 8/95) adds line 73a "Warranted Price of Land" for new construction after development cost; its Note 1 says land is valued "for their intended multifamily use", not "highest and best use" | Do you count land at my cost or at appraised value, and is unencumbered land credited as equity? |
| Hard costs | Structures, site work, general requirements, builder overhead | Form HUD-92264 line 50 "Total All Improvements" feeds line 72 development cost | Do you accept my general contractor's budget as submitted, or haircut it after your cost review? |
| Soft costs | Architect, legal, title, taxes, insurance, financing fees | Form HUD-92264 carries line 63 "Total Carrying Charges & Financing" and line 67 "Total Legal, Organization & Audit Fees" inside line 72 development cost; its architect fees (lines 45-46) sit in line 50 with the improvements | Which soft costs are financed, and which must I pay at closing? |
| Contingency | Reserve for overruns | OCC Comptroller's Handbook (March 2022): contingency allowances "usually range between 5 and 10 percent of the overall budget"; Form HUD-92264 line 71 reads "Contingency Reserve (Sec. 202 or Rehab only)" | What hard-cost contingency do you require, and do you allow a soft-cost contingency? |
| Interest reserve | Interest during construction and lease-up | OCC Comptroller's Handbook (March 2022): "typically funded via a budget line item in the construction loan"; Form HUD-92264 line 53 "Interest" sits within carrying charges | How many months of reserve, sized at what assumed rate? |
| Developer fee | Sponsor's compensation for running the project | OCC Comptroller's Handbook (March 2022): a developer fee "is often included in the project budget" and "typically does not exceed 4 percent of the project cost"; Form HUD-92264 line 68 "Builder and Sponsor Profit & Risk" sits inside line 72 development cost | Is my developer fee counted, capped, deferred, or excluded from cost? |
The HUD form shows one agency's arithmetic: line 72 "Total Est. Development Cost (Excl. of Land or Off-site Cost)" is "50 plus 63 plus 67 thru 71", and line 74 "Total Estimated Replacement Cost of Project" is "72 plus 73a or 73b and 73c". In other words, land is added last, after interest, fees and the profit-and-risk line are already in the development cost. The form also notes that "For Section 221 mortgage insurance application processing, acceptable risk analysis produces a supportable replacement cost estimate."
Do lenders count land at cost or at appraised value?
Land enters the LTC denominator either at the price you paid or at a value the lender accepts, and the gap matters most when you bought the site years ago or entitled it since, because a higher land figure raises the denominator. No public, dated source states one market rule for private lenders.
What the public documents do say is narrower. The OCC handbook defines LTC as the loan divided by "the total cost of the property plus all construction costs," lists "land purchased with cash" among "common types of equity," and says "interest or other holding fees paid or accrued on contributed land ... are generally not considered equity." The Interagency Guidelines for Real Estate Lending, reproduced in the OCC's Comptroller's Handbook (March 2022), tell banks to set "minimum requirements for initial investment and maintenance of hard equity by the borrower (e.g., cash or unencumbered investment in the underlying property)." That names unencumbered property as one example of hard equity; it does not say at what value a bank must credit it.
The federal appendix that sets bank LTV limits, 12 CFR Part 34, Subpart D, Appendix A (2024 edition), defines value as a market value estimate from an appraisal or evaluation, and adds: "For loans to purchase an existing property, the term 'value' means the lesser of the actual acquisition cost or the estimate of value." That sentence is written for purchases of existing property; the appendix does not apply it to land you already own before a construction loan.
HUD's form takes its own position: land enters as a "Warranted Price of Land" for new construction, valued for the intended multifamily use. The OCC handbook adds that construction appraisals "must include the current market value of the property (often referred to as the 'as is' value of the property)", so an as-is land value will exist in the file whichever basis the lender chooses.
Land basis documents: closing statement, as-is appraisal of the site, receipts for entitlement and pre-development spend
Are soft costs, contingency, interest reserve and developer fee counted?
Soft costs, contingency and the interest reserve enter the LTC denominator only as lines the lender approves in the construction budget, and the OCC handbook says a developer fee is often included in the project budget; no public, dated source states one industry-wide rule for private construction lenders.
Interest reserve. The OCC handbook calls interest expense "an important element of a project budget" that, "like other construction costs, should be properly estimated and reserved for." It also says the reserve "may also be funded by the borrower into a separate escrow account as a condition of the loan", and that when interest is not funded by the bank, examiners look at "whether there is sufficient equity to permit the bank to fund the interest if necessary while keeping the loan within appropriate loan-to-cost (LTC) and loan-to-value (LTV) ratios." In plain terms, even an unfinanced reserve is still tested against LTC.
Contingency. On Form HUD-92264 the contingency line is labelled for Section 202 or rehab projects only. For bank loans, the OCC handbook says the budget "typically includes a contingency account" and that allowances "usually range between 5 and 10 percent of the overall budget." Private lenders set their own requirement, which is why the table turns it into a question.
Soft costs. Legal, title, taxes, insurance and lender fees sit inside development cost on the HUD form, and architect fees sit with the improvements. Whether a private lender finances all of them is set in its budget review.
Developer fee. HUD's form carries a "Builder and Sponsor Profit & Risk" line inside development cost. For bank loans, the OCC handbook says developer fees "may be included in the soft costs provided that the costs are reasonable in comparison to the cost of similar services from third parties," that the fee may be "either deferred or disbursed based on the percentage of the project's completion," and that it "typically does not exceed 4 percent of the project cost." It adds that unearned developer fees "are generally not considered equity." No public, dated source states one rule for private lenders; ask each lender whether the fee is counted, capped, deferred until completion, or excluded.
How does HUD's 221(d)(4) program build the cost basis?
HUD's 221(d)(4) program caps new-construction loans partly by a loan-to-cost test, and HUD's Multifamily Summary Appraisal Report, Form HUD-92264, shows how an agency cost basis is assembled: a warranted land price added to a development cost that already includes interest, fees and a builder and sponsor profit and risk line.
HUD Mortgagee Letter 2025-03, dated January 8, 2025, states that under the MAP Guide "maximum loan amounts are the lesser of: a) the requested mortgage amount, b) the amount allowed by statutory limits, c) the amount supportable by applicable debt service coverage ratios, or d) the amount supportable by the applicable loan ratios." Its table sets the loan ratios for 221(d)(4) new construction and substantial rehab (NC/SR):
221(d)(4) NC/SR, market rate (or LIHTC without rent advantage) LTV/LTC: 87 percent (previously 85 percent)
221(d)(4) NC/SR, affordable (LIHTC with rent advantage to market) LTV/LTC: 90 percent (previously 87 percent)
221(d)(4) NC/SR, 90 percent or more units with rental assistance LTV/LTC: 90 percent (no change)
221(d)(4) NC/SR, market rate DSCR: 1.15 (previously 1.176)
The letter says it is "effective immediately and remains effective until amended, superseded, or rescinded." Because the loan is the lesser of several tests, the 87 percent ratio is a ceiling, not a promise; debt service coverage can bind first.
A later letter, HUD Mortgagee Letter 2026-1 (January 22, 2026), cites Mortgagee Letter 2025-03 for the market-rate thresholds and adds a Middle Income Housing option for 221(d)(4) new construction and substantial rehab:
221(d)(4) NC/SR, market rate LTC: 87 percent, DSCR 1.15
221(d)(4) NC/SR, Middle Income LTC: 90 percent, DSCR 1.11
That letter says qualifying projects should have "at least 50% of units targeted for tenant income levels up to 120% of Area Median Income (AMI)", secured by a recorded use restriction.
How do bank construction LTV limits interact with loan-to-cost?
Bank construction loans also sit under federal supervisory loan-to-value limits, which measure the loan against appraised value rather than cost, so a bank borrower faces two ceilings and the lower one decides proceeds. For commercial and multifamily construction, the Interagency Guidelines set that supervisory limit at 80 percent.
The supervisory limits table in 12 CFR Part 34, Subpart D, Appendix A (2024 edition):
| Loan category | Supervisory LTV limit |
|---|---|
| Raw land | 65 percent |
| Land development | 75 percent |
| Commercial, multifamily and other nonresidential construction | 80 percent |
| Improved property | 85 percent |
The appendix defines the ratio as one "derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit," plus any readily marketable or other acceptable collateral that also secures it. For a loan that funds land development and construction together, it says "the appropriate loan-to-value limit is the limit applicable to the final phase of the project funded by the loan." The appendix also says it "may be appropriate in individual cases" to make loans above the supervisory limits "based on the support provided by other credit factors," so 80 percent is a ceiling for bank policy rather than an absolute cap on every loan. These limits are stated against value, not cost; the bank's own LTC limit is a separate policy number, and no public, dated source publishes a single bank LTC figure. For how construction pricing is set, see our guide to construction loan rates.
Illustrative (our arithmetic): how one budget produces three LTC answers
One construction budget can produce three different loan amounts under the same LTC percentage, depending on whether land is counted at cost or credited at appraised value and whether the developer fee is allowed into the denominator. The figures below are our arithmetic on a hypothetical budget, not lender quotes.
Illustrative (our arithmetic). The budget:
Land at purchase price: $2,000,000
Land at as-is appraised value: $2,600,000
Hard costs (general contractor contract): $10,000,000
Soft costs: $1,500,000
Contingency: $500,000
Interest reserve: $900,000
Developer fee: $600,000
As-complete appraised value: $19,000,000
Assumed LTC cap for the arithmetic: 65 percent (a round number chosen for illustration, not a market quote)
| Scenario (Illustrative, our arithmetic) | Accepted cost | Loan at 65% LTC | Cash equity needed | Loan ÷ as-complete value |
|---|---|---|---|---|
| A: every line at cost, land at purchase price | $15,500,000 | $10,075,000 | $5,425,000 | 53.0% |
| B: developer fee excluded from cost | $14,900,000 | $9,685,000 | $5,215,000 (the $600,000 fee is left unfunded or deferred) | 51.0% |
| C: land credited at appraised value | $16,100,000 | $10,465,000 | $5,035,000 | 55.1% |
The spread between B and C is $780,000 of loan on the same building. In every scenario the loan sits well under the 80 percent supervisory LTV measured against the $19,000,000 value assumed here (the OCC handbook says as-completed value generally applies to a preleased project, as-stabilized to one not preleased), so on this budget the lender's cost rules, not the value test, decide proceeds. If the as-complete value were much lower, the value test could bind instead.
How do you get lenders competing for this construction loan?
Getting lenders to compete on a construction loan starts with a budget that shows every line, the land basis you are claiming and the developer fee you expect, so each lender prices the same denominator and differences in their LTC rules become visible side by side.
One option is a brokerage route. YieldStack is a commercial mortgage brokerage, not a lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing. Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed. YieldStack arranges commercial real estate financing nationwide.
What to send: the line-item budget, the land closing statement and as-is appraisal if you have one, the general contractor's contract or bid, and your proposed developer fee. Share your construction budget for lender review.
The bottom line
Construction LTC is simple division; the denominator is the negotiation. Hard costs form the core of the budget; soft costs, contingency and interest reserve count as approved lines, and land basis and developer fee are the lines to confirm with each lender. HUD's 221(d)(4) market-rate ratio is 87 percent under Mortgagee Letter 2025-03, and federal guidelines set an 80 percent supervisory LTV limit for bank construction loans. Ask every lender, in writing, how it treats land and developer fee before comparing term sheets.