LTC or LTV for down payment?
Real Estate Agent · Atlanta, GA · Member since 2014 · 66 posts · 8 votes
Good morning all,
I am trying to better understand what we should be basing our numbers on to determine down payment needed for a project using hard money? Example: If we have have a property that has a purchase price of $100,000 that needs $60,000 worth of work, which has an ARV of $200,000. Should we be basing our numbers on: LTV (70% = $140,000) or LTC (88% = $160,000)
1) What are lenders basing our down payment on?
2) What should investors base their numbers on?
How much would the down payment be in this scenario? I appreciate the help.
Dave
Good morning all,
I am trying to better understand what we should be basing our numbers on to determine down payment needed for a project using hard money? Example: If we have have a property that has a purchase price of $100,000 that needs $60,000 worth of work, which has an ARV of $200,000. Should we be basing our numbers on: LTV (70% = $140,000) or LTC (88% = $160,000)
1) What are lenders basing our down payment on?
2) What should investors base their numbers on?
How much would the down payment be in this scenario? I appreciate the help.
Dave
Great question! There is already one good answer but this will be specific to your example.
LTC stands for loan to cost. This will always be based off the the costs needed to do your project. In your case, $160k. So you would take 88% (the LTC number you were using) and multiply it by the $160k. 0.88 x 160,000 = $140,800. This is the maximum amount of the loan when looking at LTC.
LTV stands for loan to value. This will ALMOST always be based off the ARV (after repair value) of the the property when dealing with a hard / private lender. When dealing with a conventional mortgage this will ALMOST always be based on the as-is value of the home. In your case the ARV is $200k. So you would take the 70% (the LTV number you were using) and multiply it by the $200k. 0.70 x 200,000 = $140,000. This is the maximum amount of the loan when looking at LTV.
All lenders that I know of will lend to you based on the LOWER of these two calculations. So you would be able to borrower $140,000. This will leave you with a $20,000 down payment on top of your loan fees, title fees, and any other charges that may be required per your purchase agreement or the agreement with the lender.
I hope this sheds a little light on the LTC and LTV numbers. It isn't one or the other but you use both and then look at the lower of the two.
Please feel free to post more questions in this thread and we can all work on the answers and learn together.
@David Taylor your question would depend on the specific hard money lender.
Some of the lenders that we work with are at 90% LTC making us bring the remaining 10% into the deal.
They may go up to a maximum LTV of 70%
Example:
PP: $50,000
Rehab: $15,000
Downpayment: $6500
They would fund the entire project but require 10% equity to be brought
Good morning all,
I am trying to better understand what we should be basing our numbers on to determine down payment needed for a project using hard money? Example: If we have have a property that has a purchase price of $100,000 that needs $60,000 worth of work, which has an ARV of $200,000. Should we be basing our numbers on: LTV (70% = $140,000) or LTC (88% = $160,000)
1) What are lenders basing our down payment on?
2) What should investors base their numbers on?
How much would the down payment be in this scenario? I appreciate the help.
Dave
Great question! There is already one good answer but this will be specific to your example.
LTC stands for loan to cost. This will always be based off the the costs needed to do your project. In your case, $160k. So you would take 88% (the LTC number you were using) and multiply it by the $160k. 0.88 x 160,000 = $140,800. This is the maximum amount of the loan when looking at LTC.
LTV stands for loan to value. This will ALMOST always be based off the ARV (after repair value) of the the property when dealing with a hard / private lender. When dealing with a conventional mortgage this will ALMOST always be based on the as-is value of the home. In your case the ARV is $200k. So you would take the 70% (the LTV number you were using) and multiply it by the $200k. 0.70 x 200,000 = $140,000. This is the maximum amount of the loan when looking at LTV.
All lenders that I know of will lend to you based on the LOWER of these two calculations. So you would be able to borrower $140,000. This will leave you with a $20,000 down payment on top of your loan fees, title fees, and any other charges that may be required per your purchase agreement or the agreement with the lender.
I hope this sheds a little light on the LTC and LTV numbers. It isn't one or the other but you use both and then look at the lower of the two.
Please feel free to post more questions in this thread and we can all work on the answers and learn together.
@David Taylor I think you have gotten a great explanation above. BUT I am thinking that you are purchasing at WAY too high of a price with that much rehab. You are going all in at 80% of value. You know it costs at least 10% to sell with a realtor, closing costs, etc. PLUS you will have points, interest payments, etc. A 60k rehab is going to take some time. There are lots of possibilities for things to go wrong.
IF everything goes perfect, and after about 100 flips of my own only 2 or 3 have, you are going to make 10k. Downside is that you are going to lose lots of time, effort and probably some desire to do this again.
Find a better deal to start with. They say you make money on the buy. This is so true. Don't buy when there is not enough meat on the bone. There is a reason that you always hear 70% of ARV minus repairs. That leaves you margin for errors and will still get you about 10% profit.
@David Taylor I agree with @Rick Pozos on this one unless you are doing this as a rental. Then it really doesn't matter as much to how much you have invested (just never be upside down on it) because you need to focus on your cash flow to determine if it is a good deal. If this is a flip, I would get out of it. I know every market is different but here in DFW I don't buy flips when my hard costs (purchase + rehab) are more than 75% of the ARV. Even then, I prefer to be at 70% or below. Every investor will have a level they are comfortable with you. I just don't know many that are comfortable with anything above 80%.
Hey guys, thanks for the reply and feedback. This certainly helps alot. The example was generic numbers I was throwing out so you may understand my question. It isn't a deal in particular I was pursuing.
However, your responses did answer another question about keeping that loan to cost percent down close to that 70% mark as well.
Thanks again for clarifying this for me.
Your down payment would be based on your purchase price of 100k. The inverse of this would represent the LTV your lender is willing to go up to. So if your lender was offering you 80% LTV you would be paying a down payment of 80K. They are bound, however, by their maximum ARV.Also worth noting all of the different definitions lenders apply to the acronyms. in our area lenders LTV is as-is value and ARV is after repair. It differs elsewhere.