Find the Binding Limit and Cash Gap
A lender can apply several tests to the same transaction. The maximum under one test is only a candidate amount. The final loan may be restricted by purchase leverage, LTC, LTACV, income coverage, credit profile, property type, liquidity or a program loan-size ceiling. The smallest applicable cap generally controls before further underwriting adjustments.
Calculate each cap using its own accepted denominator and a consistent loan definition. Put the results in a simple comparison table. Identify which limit binds today and what happens if cost, value or income changes. A larger budget may raise a cost-based cap while weakening project profitability; a higher requested loan may improve cash at closing while reducing coverage. Improving one ratio can worsen another.
Translate the resulting commitment into day-one proceeds, future holdbacks and investor cash. Include fees, payoffs, reserves and excluded costs. The phrase up to a stated percentage does not promise that percentage on every project. Ask for written assumptions and outstanding approval conditions. Use this analysis to set a maximum offer price or required equity contribution before committing to a deal. A clear funding-gap calculation is more useful than selecting the most generous ratio and assuming the lender will ignore the rest.
Worked example
Eligible cost $300,000 at 80% LTC gives $240,000. Completed value $350,000 at 65% LTACV gives $227,500. Coverage supports $220,000. The lowest cap is $220,000. If total economic uses are $325,000, investor sources must cover $105,000, subject to timing and any other deductions.
Mini glossary
- Binding constraint
- The limit currently controlling proceeds.
- Commitment
- Maximum funding subject to contractual conditions.
- Funding gap
- Uses exceeding available debt and other committed sources.
Put it into practice
Build a three-column table for LTC, completed-value leverage and income coverage. Circle the lowest applicable amount. Reconcile it with total project uses and show acquisition proceeds separately from later draws. Ask which changes require reapproval instead of assuming the original commitment remains fixed.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.