Understanding Loan Metrics in Hard Money Lending: LTC, LTV, LTPP and LTARV

Hard money lending is a popular financing option for real estate investors looking for fast and flexible funding. In hard money lending, lenders use several metrics to determine the loan amount and structure, including LTC, LTV, LTPP, and LTARV. In this article, we’ll explore the differences between these metrics and provide an example of how they are used to determine a loan amount.

LOAN TO COST (LTC)

LTC is a metric used by hard money lenders to determine the maximum loan amount based on the total cost of the project, including acquisition and construction costs. The LTC ratio is calculated by dividing the loan amount by the total project cost, expressed as a percentage. Typically, lenders offer loans with an LTC ratio of up to 90%.

LOAN TO VALUE (LTV)

LTV is another metric used by hard money lenders to determine the maximum loan amount based on the current value of the property. The LTV ratio is calculated by dividing the loan amount by the current value of the property, expressed as a percentage. Typically, lenders offer loans with an LTV ratio of up to 80-90%.

LOAN TO PURCHASE PRICE (LTPP)

LTPP is a metric used by hard money lenders to determine the maximum loan amount based on the purchase price of the property. The LTPP ratio is calculated by dividing the loan amount by the purchase price, expressed as a percentage. Typically, lenders offer loans with a LTPP ratio of up to 90%.

LOAN TO AFTER REPAIR VALUE (LTARV)

LTARV is a metric used by hard money lenders to determine the maximum loan amount based on the after-repair value (ARV) of the property. The LTARV ratio is calculated by dividing the total loan amount by the ARV, expressed as a percentage. Typically, lenders offer loans with an LTARV ratio of up to 75%. This ensures a 25% equity cushion on the final value of the property.

EXAMPLE OF A LOAN STRUCTURE UTILIZING METRICS

Let’s say an investor wants to purchase a property for $100,000 and needs $50,000 for renovations. The current value of the property is estimated at $150,000 and the after repair value is $235,000. Based on this information, the lender would use the following metrics to determine the loan amount:

LTC: The total project cost is $150,000 ($100,000 purchase price + $50,000 renovations). If the lender offers an LTC ratio of up to 90%, the maximum loan amount would be $135,000 (90% of $150,000). This also translates to requiring the borrower to have $15,000 of their own capital into the deal. Keep this part in mind, it’s very important!
LTV: The current value of the property is $150,000. If the lender offers an LTV ratio of up to 80%, the maximum loan amount for the purchase would be $120,000 (80% of $150,000).
LTPP: The purchase price of the property is $100,000. If the lender offers an LTPP ratio of up to 90%, the maximum loan amount for the purchase would be $90,000 (90% of $100,000).
LTARV: The ARV of the property is estimated at $235,000. If the lender offers an LTARV ratio of up to 75%, the maximum combined loan (purchase + rehab funds) amount would be $168,750 (75% of $225,000).

Now that we’ve figured out the maximum amounts for each metric, we need to then ask ourselves how much of a down payment is required, at a minimum. We first start at the LTC calculation. If the lender is willing to fund 90% of the costs, that means the borrower needs to fund the remaining 10%. Most lenders require that 10% to be the borrower’s “skin in the game”, or down payment at closing.

So if the borrower puts $15,000 down on the purchase price, that would mean the lender is giving $85,000 purchase funds (plus $15,000 down equals the purchase price of $100,000).

We now double check the purchase funds against the LTV and LTPP metrics. For LTV, we can lend up to $120,000 in this scenario and for LTPP we can lend up to $90,000.

“Up to” is the key factor here. That is the maximum amount under ideal conditions. However, for determining the purchase funds, the lender will always use the “lesser of” when looking at all numbers. So in this scenario the lender will still give only $85,000 purchase funds because that ensures the borrower is still putting down their $15,000, or, 10% of total costs.

If the lender was to give $120,000 for purchase funds like the LTV suggests, the lender would actually over-fund the initial loan. The purchase price is only $100,000.

Next, lenders always fund 100% of the rehab funds. That ensures that sufficient funds are available throughout the project to complete the rehab.

So if the lender provides $85,000 purchase funds, and $50,000 construction funds, the total loan amount is $135,000. The LTARV metric suggests the lender could actually lend up to $168,750 but since they are below that amount, they will only lend the $135,000.

The final metrics are as follows:

LTC: 90%

LTV: 56.67%

LTPP: 85%

LTARV: 57.45%

Purchase Funds: $85,000

Construction Funds: $50,000

Total Loan: $135,000

Based on the above calculations, the lender would determine the maximum loan amount to be $135,000, using the LTC ratio as the most restrictive metric since we are “capping out” that metric.

In conclusion, hard money lenders use a variety of metrics to determine the loan amount and structure, including LTC, LTV, LTPP, and LTARV. Each metric provides a different perspective on the loan-to-value relationship, and can impact the maximum loan amount that a borrower can receive. It’s important for borrowers to understand these metrics and how they are calculated, as they can affect the amount of funding they can secure for their real estate project.

When working with a hard money lender, borrowers should ask about the lender’s underwriting criteria and the maximum loan amounts that can be provided based on each metric. By understanding these metrics and working with a reputable lender, borrowers can maximize their chances of securing the funding they need to succeed in their real estate investment endeavors.

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Understanding the Difference: Direct Balance Sheet Hard Money Lenders vs. Loan Brokers

In the world of real estate investing, particularly in fix-and-flip projects, financing is a key component. Investors often turn to hard money loans for quick, flexible funding. However, it’s essential to understand the difference between direct balance sheet hard money lenders and loan brokers, as each offers unique advantages and considerations.

MJ Jannamon

2021-12-31

I was brand new to the entire process, Matt Podesto and his team worked with me every step of the way, making sure I understood and answered all questions that came up. They were very punctual and on top of it from the initial contact to the closing date. Requested my first contractor draw and within hours (not days or weeks) they already scheduled an inspection. Blown away by their service and care. My only regret is that I wasted time with other lenders before finding Black Label Capital. Don’t make my mistake, call Black Label first and get with Matt, he’ll take awesome care of you.

Jorge Rojas

2021-12-30

This is the best Hard Money Lender in whole Metroplex. Ease to wok with, I never had any issues with them.

Kaye Green

2021-12-29

This lender has been great to work with. Their process and customer service has exceeded my expectations. I'm always able to get in touch with my lender and he was able to thoroughly answer all my questions throughout the transactions. Will definitely recommend BLC to others.

Sam A

2021-12-28

Quick and super easy to deal with, we closed on a house in 48 hours, now I have 5 open loans with Matt, not to mention the personalized service that Matt provides.

MARGARITA GRAHAM

Great communication throughout and quick responsiveness!

David Plowden

2021-12-23

I can't say enough about the process and customer service Black Label Capital provided my business in closing my loan. The process was seamless and they exceeded my expectations. I highly recommend Black Label Capital for all your lending needs.

Alex Pezeshki

The staff has made it easy and understanding in dealing with funding. I have done two projects with Black Label Capital and I can't wait to do more with them!

Cleveland Robinson

2021-08-06

Good lender to work with. What makes them valuable is that there are no junk fees and their approach to lending is straight forward.I was very pleased with my transaction.