How do I calculate the maximum loan amount?
How do I calculate the maximum loan amount?

A detailed explanation of how maximum loan is calculated for collateralized loans

Written by Ben
Updated over a week ago

Maximum loan amount for loans secured by real estate is calculated based on the lower of the following 2 leverage ratios:

Loan to Cost (LTC) - is the total value of the financing (acquisition loan + rehab loan) divided by the total costs (purchase cost + rehab cost) - i.e., total loan to total cost. For the purposes of this example, we will use an LTC of 85%.

After Rehab Value (ARV) - is the ratio of the total value of the financing (property acquisition loan + rehab loan) divided by a third-party appraisal after the rehabilitation of the property - i.e., total loan to final value. For the purposes of this example, we will use an ARV of 75%.

As an example, if the cost of the property is \$200,000 (if the appraised as-is value comes in lower than the purchase price, we will use the lower value) and the expected cost of rehab is \$50,000, and the appraiser determines the ARV to be \$290,000, here is how we would calculate the maximum loan amount:

LTC calculation - (200000+50000) * .85 = \$225,000. So based on LTC, the loan amount is \$225,000

ARV calculation - 290000 * .75 = \$217,500. So based on ARV, the maximum loan amount is \$217,500.

Based on these calculations, using the lower of the two, the maximum loan amount is \$217,500. We would hold back the \$50,000 construction budget, so we would loan a maximum of \$167,500 for the purchase (217500-50000). The borrower would be responsible for bringing the difference needed to close, and we would then fund 100% of the construction, in draws, based on completion percentage.

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