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. At this time, we lend up to a maximum of 90% LTC.
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. At this time, we lend up to a maximum of 75% ARV (up to 80% for highly qualified borrowers at the "institutional level").
As an example, if the cost of the property is $200,000 (note, 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) * .9 = $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.