How the calculator sizes a hard money loan
A hard money program can set several ceilings at once, each measured against a different base, and the loan can't break any of them. The calculator works through four steps, in the same order as the iPhone app:
- Size. Each limit you turn on produces a dollar cap: As-Is LTV against today's value, LTC against purchase price plus rehab budget, and LTARV against the after-repair value. The loan also can't exceed the purchase price plus the share of the rehab the lender funds. The maximum loan is the lowest of these caps, rounded down to the dollar. The limit that sets it is the binding constraint; if none of the limits is that low, the loan is limited by financed project cost.
- Allocate. The rehab money the lender funds is held back at closing and released in draws. What's left of the loan is the acquisition advance, which goes toward the purchase.
- Measure. The proposed loan is divided back into each basis, so you can see the actual As-Is LTV, LTC and LTARV of the deal, not just the limits.
- Price. Points, the lender fee and interest (on the full loan, or only on the advance and each draw once it funds) give the lender's estimated gross revenue. Points, the fee and any interest reserve withheld at closing feed the borrower's estimated cash at closing.
If you enter a requested loan amount, the calculator checks it against the maximum. A request that fits is used as entered; a request that doesn't is cut back to the maximum, and the excess is shown so you know exactly how far over the program it is.
The formulas
These are the exact rules the iPhone app uses. Amounts are calculated in exact decimal arithmetic and rounded only where the app rounds them: each cap down to the whole dollar, and each dollar result once, to the cent.
Worked example: the default deal
The calculator opens on a fix-and-flip deal: a $300,000 purchase with an as-is value of $400,000, a $100,000 rehab budget and an ARV of $550,000. The program allows 70% As-Is LTV, 90% LTC and 70% LTARV, funds 100% of the rehab, and prices at 12% interest with 2 points over 12 months.
| Limit | Calculation | Cap |
|---|---|---|
| As-Is LTV (binding) | 70% × $400,000 | $280,000 |
| LTC | 90% × ($300,000 + $100,000) | $360,000 |
| LTARV | 70% × $550,000 | $385,000 |
| Financed project cost | $300,000 + 100% × $100,000 | $400,000 |
The as-is limit is the lowest, so the maximum loan is $280,000. Of that, $100,000 is held back for the rehab, leaving a $180,000 acquisition advance. The borrower covers the other $120,000 of the purchase.
| Points (2% of $280,000) | $5,600.00 |
|---|---|
| Monthly interest (12% ÷ 12 on the full loan) | $2,800.00 |
| Scheduled interest, 12 months | $33,600.00 |
| Estimated cash required at closing | $125,600.00 |
| Estimated gross lender revenue | $39,200.00 |
Cash at closing is the $120,000 purchase gap plus $5,600.00 in points; the example has no lender fee or interest reserve. Interest isn't in it: the calculator treats interest as paid over the term, and only an interest reserve you enter is collected at closing.
What the calculator leaves out
- Third-party closing costs. Title, escrow, recording, transfer taxes, insurance and appraisal fees aren't in cash to close. Add them from the settlement estimate.
- Amortization and APR. Loans are modeled as interest-only, with the principal repaid at maturity or payoff. No amortization schedule or APR is calculated.
- Underwriting. Credit, experience, the exit plan and the appraisal can all change what a lender will offer. The calculator applies the limits you enter; it doesn't decide them.
Lenders also define their ratios differently. Some apply the as-is limit only to the amount funded at closing (Flynn Lending, for one), and some add closing costs to loan-to-cost. This calculator applies every limit to the total loan and uses purchase plus rehab as cost. Read LTV vs LTC vs LTARV before comparing two lenders' numbers.
Questions
How are hard money loans calculated?
A program can set several limits at once: a maximum loan-to-value on the as-is value, a maximum loan-to-cost on purchase plus rehab, and a maximum loan-to-after-repair-value. Each limit gives a dollar cap, and the maximum loan is the lowest of them (in this calculator, never more than purchase price plus funded rehab). The funded rehab is held back and paid out in draws, and interest is calculated interest-only.
What is the binding constraint?
It's the limit that produces the lowest loan amount, so it's the one that actually caps the loan. If two limits produce the same whole-dollar amount, both are binding. Raising any other limit won't increase the loan until the binding one changes.
Are points charged on the rehab holdback?
In this calculator, as in the iPhone app, points are a percentage of the gross loan, including the rehab holdback. Lenders set their own fee terms, so check the term sheet for the amount the points are charged on.
Is interest charged on the whole loan from day one?
It depends on the loan. Under full-balance (often called Dutch) terms, interest runs on the entire loan, including undrawn rehab money. Under funded-balance (non-Dutch) terms, interest runs only on money actually disbursed. Switch the setting under Pricing to compare.
What does the cash-to-close figure include?
The part of the purchase price the loan doesn't cover, plus points, the lender fee and any interest reserve withheld at closing. It excludes title, escrow, taxes, insurance and other third-party charges.
Why is the maximum loan rounded down?
Each limit is rounded down to the whole dollar so the displayed maximum can never exceed the true limit. That's also how ties between limits are judged.
Is this a loan offer?
No. Private Lending Deal Desk is not a lender. The calculator estimates loan terms from the inputs you enter; it doesn't approve, quote or guarantee any loan.