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90% Hard Money Loans and Percentage Confusion

Recently, there has been a change in how some lenders are marketing LTVs (Loan to Values): 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, bring less money to closing when you purchase. But you have to read the fine print. They often will loan EITHER 90% of purchase price plus rehab OR 70% of ARV, whichever is LESS. The reality is, you are bringing a minimum of 10% down no matter what your deal looks like.

Unfortunately, this has confused both new and experienced borrowers, and it’s time to clear up this confusion. First, 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. Confused yet? I promise you’re not alone.

Let’s look at some examples 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. The formula is the maximum loan amount ($105,000 in this example) or 90% of cost plus rehab ($90,000 + $5,000), whichever is less.

Let’s say you are purchasing this same house for $120,000. Based on the advertising, you would think that you were getting a loan amount of $108,000 (90% X $120,000). But, because the maximum loan amount is $105,000 (70% X $150,000), your actual note would be for the same amount, $105,000.

To add to the confusion, the advertising states receiving 100% of the rehab cost. This is true for almost 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 in to every loan. If you are working with a lender that is not loaning 100% of the rehab costs, it is an anomaly, and you may need to 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 should be included in the loan. Most importantly, read the fine print and do the math to see how any offer will actually work out in the end.