There’s been a change in how some lenders are advertising LTVs (or Loan to Values) in hard money loans: Borrow up to 90% of the purchase price and up to 100% of the rehab cost. At first glance, you might think you are getting a higher loan amount, and in turn, bringing less money to closing when you purchase. Before moving forward with one of these loans, be sure to read the fine print and ask the right questions.
To clear up this percentage confusion, this messaging means the lender will loan either 90% of the purchase price plus rehab cost OR 70% of the ARV, whichever is less. The reality is you are most likely bringing a minimum of 10% down no matter what your deal looks like.
Unfortunately, this has confused both new and experienced borrowers and even some lenders. When you see “90%,” be sure you pay attention to the next four words, which say “of the purchase price.” This means you are getting a loan based on 90% of the cost of the property, AFTER calculating the maximum loan amount at 70% of the ARV. If you’re confused, you’re not alone.
Let’s look at an example to help you understand. If you are buying a house for $100,000 that has an ARV of $150,000, with $5,000 in rehab, your loan amount is going to be $94,500, instead of $105,000. This is because 90% of the cost, plus the rehab ($90,000 + $5,000), is less than $105,000.
To add to the confusion, the advertising states “with 100% of the rehab cost.” There should be no surprise here, as this is true for every hard money loan. Lenders want to fund 100% of the rehab cost to make sure that all of the work is getting completed. Therefore, the total rehab cost is built into every loan. If you are working with a lender that is not loaning 100% of the rehab costs, find another lender.
What should you expect when looking for a loan? Most lenders will loan up to 70% of the ARV for a flip, and up to 75% for a rental property, regardless of the purchase price. If you buy a deal below the LTV threshold, many lenders will give you 100% financing. Of course, it’s based on your financial profile and the amount you can be approved for, without overextending yourself. And, of course, 100% of the rehab is included in theloan. Most importantly, read the fine print and do the math to see how any lender program will impact your total costs.