DSCR Loan vs Conventional Loan: 11 Facts You Should Know

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11 categories to consider a DSCR loan vs conventional loan.

In real estate investing, you come across two main loans: a DSCR loan and conventional loan. These are the main methods of financing everything from a single family up to fourplexes.

But how are they different? Most importantly: when should you use each one?

Let’s go over the differences between a DSCR loan and conventional loan.

What Are a DSCR Loan and Conventional Loan?

DSCR stands for debt service coverage ratio. A DSCR loan is specifically made for investors’ rental properties.

There are three main requirements for a DSCR loan:

  1. The property has value.
  2. You have good credit.
  3. Rent covers the property’s expenses.

While a DSCR loan is investor-only, conventional loans have a broader usage.

There are many types of conventional loans, which are also often called traditional, Fannie Mae, or Freddie Mac. Investors often use these loans for refinancing properties – both owner-occupied and rentals.

Which Loan Should You Use?

You’ll need to use both types of loans in your investment career.

Although there are tried-and-true investment techniques, every property will require something slightly different. Plus, depending on where you are in your investment career, credit, and income, the loans you’ll need will change.

Let’s compare and contrast 11 categories and discuss whether a DSCR loan or conventional loan has the advantage.

11 Things to Know About DSCR Loans vs Conventional Loans

  1. Income

DSCR loans only look at the rents on the property and whether it covers the expenses. They won’t bother with your W2s or other proof of income.

Traditional loans do consider W2s, tax returns, and other financial records from the past several years.

Advantage: DSCR

  1. Down Payment

Both DSCR and conventional loans typically require a 20% down payment. However, this can vary depending on your credit score.

Advantage: Neither

  1. Credit

DSCR loans may accept a lower credit score, as low as 640. Traditional loans may require a higher credit score – usually 680 or higher.

Advantage: DSCR, slightly

  1. Closing in a Business Name

Traditional loans only allow closing in a personal name. You can quick claim it later into your business name, but you must close in your name. DSCR loans let you close in an LLC – in fact, they prefer it.

Advantage: DSCR

  1. Time in Business

DSCR loans don’t care how long you’ve been in business, while traditional loans require at least two years of business income.

Advantage: DSCR

  1. Loan Rates

So far, it seems like DSCR loans have all the advantages. But when it comes to interest rates – one of the most important considerations for a loan – you’ll see it switch.

Conventional loans almost always have a 1-3% lower rate than a DSCR loan. This can be a deciding factor when you’re considering cash flow. 

Advantage: Traditional

  1. Underwriting

DSCR loans require less documentation than traditional loans. Conventional loans ask for every possible piece of information. DSCRs only need your credit score, your LTV, and the property’s rent.

Advantage: DSCR loans.

  1. Cash-out Options

DSCR loans may offer cash-out options of up to 80% of the appraised value, depending on your credit. Traditional loans max out at 70%.

Advantage: DSCR

  1. Types of Properties

What if you have a property that has between five and eight units? Or what if you have a mixed-use property? The only one of these two loans that will even consider a unique property like that is DSCR. You can get conventional loans for only 4 units or less.

Advantage: DSCR

  1. Prepayment Penalties

A prepay penalty means you’ll have a fee if you pay off a loan within a certain timeframe. The lender wants to incentivize you to keep the loan on the property for a longer amount of time. DSCR loans usually have a standard prepayment penalty between 3-5 years. Traditional loans typically have no such penalty.

Advantage: Traditional

  1. Underwriting Guidelines

A nice thing about conventional loans is that they have standard, electronically underwritten guidelines. Any bank or mortgage company you go to will have the same “rules.”

With DSCR loans, on the other hand, every lender has slightly different requirements, underwriting, and rates.

Advantage: Traditional

When To Use a DSCR Loan vs a Conventional Loan

You might need both of these loans, so it’s important to understand the advantages and disadvantages of each.

Not sure where to start with finding a loan? That’s why you should work with someone like Hard Money Mike. We shop the nation for the best loans to match with our clients.

Email us at Info@HardMoneyMike.com with any questions.

If you need more help deciding if a DSCR loan is right for you, download our free DSCR calculator here.

Happy Investing.

Homegrown Happiness

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Homegrown happiness is a goal that every homeowner has. This home, recently flipped by one of our long-time, outstanding flippers, Ryan, goes far beyond homegrown happiness. The happiness doesn’t start when you walk in the door, it starts when you walk onto the property. What he did to the land and the exterior of the home is really what makes this house shine.

When he first walked onto the property, it was as though the land was trying to take back the area and swallow the house back into its wild, arboraceous garden. There was a thick foundation of old, decaying leaves covering the land from the edges of the house all the way out to the fence lines. There were dead tree limbs laying to and fro. The fences around the property were cracked, stained, and partially uprooted. Ryan knew that he had to start on the outside if he even had a chance of pulling this house out from under this mess.

With a good landscaping crew alongside him, they whipped this place into shape quickly. Give a little TLC to the land, and it will give it right back to you in spades. Homegrown happiness is found with a bright green lawn, sparkling new white paint on the fences, and the trees trimmed and happy. This property had an entirely new feel to it. It was welcoming and comforting. It made people want to take a deep, full breath and just enjoy the scenery.

And on top of the beautiful landscapes outside, he turned the interior of the house into a shockingly charming home. It goes to show that a homegrown happiness is only truly found if both the interior and the exterior of the home reflect the TLC that you put into it.

Do You Need a Hard Money Loan?

With hard money loans, it’s very important to shop around. Every hard money lender will offer a slightly different type of loan, with slightly different requirements.

There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.


Contact us for a Hard Money Loan

Check us out on YouTube

Hard Money Mike funds loans in Colorado, Oklahoma, and Texas.

Make Yourself at Home

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Many homeowners have a goal of making their home so comfortable and inviting, that they can say to anyone, “Make Yourself at Home”. For some, it comes easily, as they are natural caretakers and hosts. For others, it comes with much more effort. But the end result is always the same. People are so comfortable and have such a feeling of welcome in the home that they almost don’t want to leave.

That, right there, was the main goal that Ben had when fixing up and flipping this home. He wanted to provide this home with such a magical makeover that the new owners would feel as though their home was so inviting and cozy that they could welcome anyone in and offer them that homely warmth that we all love so dearly.

Ben knew that a lot of that comfort comes in how the home is furnished and designed. However, he also knew that a big part also comes from the house itself, and the feeling you get when you walk in. The bones and structure of the home go a long way in making the house feel a certain way. In addition, the flooring, paint, and appliance choices he made were an integral part of his ultimate vision. He wanted to provide a house that had the strong beginning and foundation of the warmth and comfort that would eventually be present in the home.

With his focus set, he was able to turn this house around in less than 5 months. He purchased the home for $157,000 and ended up selling it for $312,500! Not only did he accomplish what he set out to but made more of a profit than expected in this tough market. That goes to show you: giving a house that warm and fuzzy feel goes a long way. People who have homes that are so welcoming always want to share the warmth, invite people in, and say “Make Yourself at Home!”

Do You Need a Hard Money Loan?

With hard money loans, it’s very important to shop around. Every hard money lender will offer a slightly different type of loan, with slightly different requirements.

There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.


Contact us for a Hard Money Loan

Check us out on YouTube

Hard Money Mike funds loans in Colorado, Oklahoma, and Texas.

How to Use the Quick DSCR Loan Calculator

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A DSCR loan calculator that shows the best loan to secure future cash flow.

There are two items you need to calculate DSCR: income and expenses.

Income is the rental income from the property. And for expenses, lenders only look at four costs: mortgage, taxes, insurance, and HOA. The debt service coverage ratio essentially compares the income to the expenses.

To make this calculation simple, we have a free DSCR calculator that you can use to find all this information.

Let’s go over an example of how to use this calculator to learn your DSCR and the best loan product for your property.

The Numbers You Need for a DSCR Calculator

The main numbers you’ll need to bring to the calculator to get an accurate DSCR are the property’s expenses and its income.

Mortgage

Firstly, we need to nail down the relevant expenses to input into our DSCR calculator. The first of these is the mortgage payment.

The two pieces of information you need to know are: 

  • What is the purchase price of the house?
  • What LTV will you qualify for?

The calculator finds out the mortgage payment for you. Let’s say our property is $300,000. You may need or qualify for an LTV anywhere between 65-85%, but we’ll just go with the average of 75% for our example. Our loan, then, is $225,000.

Let’s say we qualify for a 7% interest rate. You’ll also input that number. Then the DSCR calculator will show the total monthly payments on three different products: interest-only, 30-year amortized, and 40-year amortized.

Taxes, Insurance, HOA

For these final three expenses, you might already have the hard numbers available for the property. Otherwise, you’ll have to make an educated guess based on your area.

For our example, we used:

  • Property Taxes: $150
  • Insurance: $100
  • HOA (only applicable depending on your neighborhood): $150

Rent Income

Lastly: the property’s rental income. You may already have a tenant with a set rental rate. In that case, use that number. If you’re not currently charging rent, you’ll have to do some research on other housing in the neighborhood to see what you can realistically charge your future tenants.

In our example, we’ll say we get $1,700/month from this property.

The DSCR Loan Calculator’s Results

As shown below, the DSCR calculator shows you the costs, rents, and ratios of three possible DSCR products: an interest-only, 30-year AM, or 40-year AM.

This comparison gives you a look at different cash flows from different loan products. This can help you decide which loan you should apply for. You’ll have to consider both loan length and cash flow.

In our example, the interest-only loan is over 1, so that one will likely give us the best rate, best LTV, and highest cash flow.

The other two loan options are just under 1. There will still be some options on the market for DSCRs under 1, but you’ll have a higher interest rate.

Use a DSCR Loan Calculator for Your Property

If you need a DSCR loan for your property, you can find our DSCR calculator at this link.

Have more questions about DSCR? Interested in a loan? Send us an email at Info@HardMoneyMike.com.

Happy Investing.

Hard Money vs Cash: Which Should You Use for Real Estate Investing?

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Have your cake and eat it too: using hard money vs cash on real estate offers.

Is it better to make an offer on a property with hard money or cash? Which saves money in the long run? Is it the same in the eyes of the seller?

We’ve been doing real estate investment funding for 20+ years and seen tens of thousands of transactions. Here’s what we’ve found to be true: The majority of clients that get deals make a cash offer first, then let their hard money lender take it from there.

Let’s go through the steps to do this legally and on time to help you get the deals you want.

Hard Money vs Cash

What is the difference between a cash offer and a hard money offer?

A cash offer is your money. You bring the money in, and you have no requirements from the seller.

With a hard money offer, you’re borrowing money. You bring in a third party, a lender, and they will have requirements like underwriting, appraisals, credit, etc.

The Seller’s Perspective on Hard Money vs Cash

The seller and their realtor want the least amount of complications possible. Using a loan and bringing in a lender adds complications.

A cash offer, on the other hand, reduces friction. The seller’s side knows they won’t have to worry about:

  • Is the buyer approved for a loan?
  • Do we have to wait for an appraisal?
  • Will there be anything that will slow down this process?

A real estate seller will almost always prefer cash over any kind of loan – even a hard money loan.

Cash Is King…

From the seller perspective, cash offers are undoubtedly the best. From an investor’s perspective, however, it’s almost always better to buy properties with leverage.

But because cash means fewer complications and a faster close, sellers will often give a better price for cash offers.

And in real estate investing, it’s important to get the lowest possible price. So, you should always use cash on a contract offer when possible. It allows you to purchase a property quickly, at the price you want, with no extra costs.

How does this work?

When you put in the offer, check the box that shows it’s a cash offer. The seller will likely accept it (at the lower price you want). Checking the “loan” box on this form automatically makes you slightly less likely to get the property.

…But Leverage Is Power

Once it’s accepted, you can hand the contract over to a hard money lender, like Hard Money Mike. We will reach out to the title company and let them know it has changed from a cash transaction to a hard money loan. The transaction is approved, ready to close, and can be changed by a hard money lender fully legally.

At the closing table, the title company lets the seller know there is an amendment to the contract.

But once the deal gets to the closing table, you’re done. You’re closing the property and the deal at the price you wanted.

A “cash offer” will give you an advantage in the market, but a hard money lender can help you with the actual funds.

Hard Money Lender Help with Cash Offers

There is a big difference between hard money vs cash. When you put in your offer, check the cash box. But you can legally have a hard money lender change it into a loan and get it closed with the best price in time.

We always want to get you the best deal. Now is a great time to invest. If you find a great property, make a cash offer, give us a call, and we can convert it to a hard money loan.

Email us at Info@HardMoneyMike.com to send us a deal or ask any questions about the hard money loan process. You can also get more weekly real estate investing information on our YouTube channel.

Happy Investing.

Go Big or Go Home

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You’ve heard of the saying, “Go Big or Go Home”? Well, why not make it “Go Big AND Go Home”? With what we saw happen with this property in Aurora, CO, we can confidently say that Phil, the fix and flipper, pulled out all of the stops in order to make this house a home.

 

Purchased in mid-summer at $188,500.00, the house was in rough shape. Phil set his budget at $45,000.00 with everything from demo and new paint to new hardwood floors and updated appliances. Due to his keen knowledge of the area and the upper class neighborhoods nearby, he knew he had to bring his A-game, so that he did.

For instance, take a look at this half bath. He completely gutted it and replaced it with a modern, sleek look. He re-textured the walls, put in new floors, and finished it off with a gorgeous new vanity with a drop-in sink. Talk about jaw-dropping.

We move into the kitchen and see that his A-game didn’t stop in the bathroom. Again, he completely gutted it and put in new floors, new tile, new appliances, and new paint. Everything is sparkling and new. Almost too luxurious to cook in, right? No way, this kitchen offers any chef the ability to make scrumptious masterpieces that look as good as the setting they were made in.

The fact of the matter is, Phil took this home from rags to riches. He saw the beauty underneath what was left by the previous owner. And a good thing he did! He ended up selling this house for $330,000.00 after only 4 months of solid work! That’s an incredible payoff and he earned every penny. There is no doubt about it, he went BIG and made this a home.

 

Do You Need a Hard Money Loan?

With hard money loans, it’s very important to shop around. Every hard money lender will offer a slightly different type of loan, with slightly different requirements.

There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.


Contact us for a Hard Money Loan

Check us out on YouTube

Hard Money Mike funds loans in Colorado, Oklahoma, and Texas.

How to Qualify for a DSCR Loan in 3 Steps

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3 quick tips from a lender on how to qualify for a DSCR loan.

In the real estate investing biz, you need to become fast friends with the DSCR loan.

DSCR loans are great for getting out of hard money on fix-and-flips you end up wanting to keep. They’re also a great alternative to traditional loans for any rental property.

While traditional loans have universal (and often strict) underwriting guidelines, DSCR loans are a little more individualistic. Each lender is their own gatekeeper to their DSCR loans

Even though qualifications vary from lender to lender, we want to share with you 3 steps that will always move you toward a DSCR loan approval. Here’s how to qualify for a DSCR loan in 3 steps.

1. Credit Score: Understanding Your Credit

Your credit is the main factor that lenders consider when evaluating your loan application.

Many lenders (especially in the current tightened lending environment) will zero in on your credit score. But all lenders will at least check your report to look for foreclosures, bankruptcies, and your history in general.

Often, though, a higher credit score can get you a better loan-to-value (LTV) ratio and a lower interest rate. For example, a 740 score will get you an LTV 5-10% more than a 640 score. Your interest rate with a 740 score will be .5-2% lower than the interest rate with a 640 score.

If your credit score is below 700, you should take steps to improve it – such as paying down credit card debt and making sure all your payments are on time. 

This article offers some ideas for raising your credit score quickly. You can also download this free credit score checklist to get you where you need to be.

2. Money: Down Payments, Closing Costs, and Reserves

In addition to the down payment, you’ll need to have enough money for closing costs and reserves.

Down payment will be 20-30%, depending on your credit. It’s also important for you to know how much equity the house will have, as this will predict some of your loan terms.

For reserves on a DSCR loan, lenders often require you to have 3-6 months’ worth of mortgage payments. This extra cash protects the lender in case your tenant unexpectedly vacates or some other unexpected situation arises.

The money doesn’t necessarily have to be yours – you can borrow OPM from a business partner, friend, or family member. To get a DSCR loan, though, your lender will want to see the funds for a down payment and reserves to approve you.

3. Know Your Numbers: Property Income and Expenses

DSCR loans are based on the property’s ability to generate income and pay for itself. So your in-flow and out-flow numbers are a major factor in whether or not you get a DSCR loan.

The minimum requirement is that the rent covers all expenses. 

Expenses include:

  • The mortgage payment
  • Taxes
  • Insurance
  • Any HOA fees

Expenses not considered by your lender include:

  • Property management fees
  • Utilities
  • Maintenance

If the property generates more income than expenses, you’ll get a better rate. However, if it doesn’t break even, you’ll likely end up paying a higher rate.

For example, if you show a lender your property can bring in $1,250 and your payments are only $1,000, you can get a better rate.

Know your numbers to get your DSCR loan approved. The last thing you want is a bad surprise when the lender tells you the numbers won’t work out like you thought.

How to Qualify for the Right DSCR Loan

These 3 steps are how you can qualify for a DSCR loan for investors.

Remember to focus on:

  • Improving your credit score
  • Having money for down payments and reserves
  • Knowing your numbers ahead of time

Leverage is king in real estate. With a little bit of effort, you can secure the financing you need to grow your real estate investment portfolio.

We want to get you the right loan for the right project. Show us a deal or ask us any questions at Info@HardMoneyMike.com.

Cottage in the City

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In today’s wild and crazy world, who wouldn’t love a cottage in the city? You get the convenience of being in the city, but at the same time you get the warm, cozy feel of a cottage. And not just any cottage, this home offers far more than your average cottage. Jed and Sam found this property out of sheer luck, they weren’t even initially thinking of looking in this neighborhood. They stumbled across a diamond in the rough and knew it from the get-go.

This 5-bed, 3-bath, 2,506 square foot home hadn’t been updated in over a decade and these guys were able to purchase it for $260,000. Their scope of work included everything from demo to bathroom facelifts.

Let’s start with the kitchen. Not a bad looking kitchen to start with, the design is gorgeous. But by replacing the appliances and countertops and giving everything a new shine with some fresh paint, it looks like a brand new kitchen!

And the best part about flipping is that you don’t always have to go above and beyond. Simple fixes such as new carpet, smooth ceilings, and refinishing some wood can make all the difference.

These guys put in their best effort in the small touches that aren’t seen in the photos. Things such as closet lights that are motion detected, and mirror defoggers in all of the bathrooms so the mirrors won’t fog up during a shower. When all was said and done, this homely cottage shot up in value like this neighborhood had never seen. At the onset of this project, they set their ARV at $340,000. But interested buyer after interested buyer set the final offer price at $388,500!

Do You Need a Hard Money Loan?

With hard money loans, it’s very important to shop around. Every hard money lender will offer a slightly different type of loan, with slightly different requirements.

There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.


Contact us for a Hard Money Loan

Check us out on YouTube

Hard Money Mike funds loans in Colorado, Oklahoma, and Texas.

7 Ways to Get the Best Rate on a Hard Money Loan In This Market

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Interest rates can make or break your REI project. Here’s how to get the best rate on a hard money loan.

Investing is a leverage game.

You need other people’s money to make money – but that doesn’t mean you have to overpay for that money. 

Let’s take a look at how to get the best rate on hard money loans in the current environment.

What Is Hard Money?

Hard money is sometimes called asset-based lending, or private money.

Hard money is a form of leverage focused on the property. All lenders have criteria they require from borrowers. For hard money lenders, the main lending requirement is about the property and project itself.

Lender Niches Will Affect Your Rates

Investors have their own niches, their own likes and wants for their investment experience. Maybe someone doesn’t want rural properties, someone else focuses only on high-end houses, another on low price points.

Lenders have individual likes and dislikes the same way. Every lender draws a box of what they like to lend for. The more your property fits in their box, the better rate they’ll give you.

This means that not all lenders will want your particular project – or that they won’t give you the best rate on your hard money loan. It’s not personal. Not every project will fit in every lender’s “box.”

If you want the best rate, then you’ll have to find the lender that likes your project, your experience, and your property.

Types of Private Money

There are three types of lenders that make up the private lending world: local, national, and OPM.

  • Local Lenders: Lend regionally, in your state or city only.
  • National Lenders: Backed by Wall Street hedge funds. They lend all throughout the US.
  • Real OPM: Other People’s Money. A private loan from someone you know..

The best rate on a hard money loan will vary lender to lender, depending on the type of institution and their preferences. One lender might do land loans, but another won’t. One may offer great rates on new builds but not even offer scrapes.

Whatever your project, it’s important to find a lender that matches you. The closer you match a lender’s preferences, the better your rate.

Despite all these differences between lenders, there are some general rules between the three types of hard money.

Real OPM

The best possible rates come from OPM. A friend, family member, or other investor who wants a safe place to put their money will cost you a lot less than a formal lending institution.

You save on cost with an OPM loan because there are no points, fees, or appraisals. Every institution will charge you these extra on your loan.

OPM also saves you the most on interest rate. The interest rate criteria for most OPM lenders is, “more than they could get in an IRA.” Typically with OPM, interest rates are 3-4% less than other lenders.

National and Local Hard Money Lenders

Both local and national lenders will have similar pricing, for the most part.

Rates for these lenders depend on what they’re looking for in their portfolio. Now, in late 2022 to 2023, most lenders’ rates will be between 9-12%.

One difference, however, is that local lenders tend to not have extra underwriting and appraisal fees.

Shopping Around to Get the Best Rate on a Hard Money Loan

The best rates aren’t going to come to you. You’ll have to shop around to find the best lender for each of your projects.

Talk with lenders in your area and get estimates for loan costs. Then, you can use our free Loan Optimizer tool to quickly compare lenders and find out who’s cheapest.

Lowering Risk to Get the Best Rate on a Hard Money Loan

To get the best rate on a hard money loan, think of it from the lender’s perspective. They want to lend to people who are low risk. Therefore, the less risk you pose, the better your rates become.

So how do you lower the risk? Here are 7 ways you can lower your risk to get a better rate from a lender.

1. Straight Talk

Firstly, be able to back up everything you tell your lender. No lender wants to be in a position where they have to try and figure out what’s true and what’s not.

If you do this, lenders will put you at the end of their long line of waiting borrowers – or they’ll increase your cost.

Give them all the information they need. Be honest about everything – even the ugly parts of your credit or investment history. If you think your rate will be worse if they knew the full store, just remember… It’ll be even worse if they find out you hid it.

2. LTV

The lower the loan amount on a property, the less risk for the lender. The less risk for the lender, the more likely they’re going to give you a better rate.

Putting more money down results in a lower rate overall.

3. Experience

If you can show a lender that you’ve had success flipping houses, building homes, or developing land, you pose less risk. Investors with projects under their belt usually see lower interest rates.

4. Credit

National lenders (hedge funds) use credit as one of their main criteria for rates. The better your credit, the better the interest rate they can offer you.

The difference between a 640 score and a 740 could be a difference of 1-1.5% on your interest rate.

Local lenders and OPM lenders don’t consider your credit score as a major requirement. They will look at your credit, but only to make sure you’re not defaulting or have a foreclosure or bankruptcy.

5. Property & Project Types

As mentioned before, each lender has a real estate niche. If your project fits in their box, you can catch a bit of a break on the interest rate. If it does not fit in their box, they may still lend to you, but they can charge you a little more, making your project less profitable.

6. Loan Size

Some lenders won’t lend under a certain amount.

Hedge funds often dislike smaller loans. Some won’t lend under $100,000 – some have a threshold at $500,000.

Smaller loans, like $25k or $50k, are more suitable for OPM. OPM lenders often have smaller available reserves to lend.

7. Location

Local lenders tend to have a specific region of service. National lenders tend to only loan in metropolitan areas. And OPM lenders tend to be more flexible.

But again, each individual lender will have their own preferences. To get the best rate on a hard money loan, find out the lender whose box you best fit in.

The Truth About How to Get the Best Rate on a Hard Money Loan

If you want the best interest rate on a private loan, you really need to shop around.

There’s money in the money, and the less you have to pay for leverage, the more successful your real estate investing career becomes. Hard money is a powerful investing tool, but the wrong interest rate can destroy your project.

You can download our Loan Optimizer here. Send us an email at Info@HardMoneyMike.com if you have any other questions about how to find the right hard money loan. And check out our YouTube channel for more free real estate investing information.

Happy Investing.

How to Calculate Your Hard Money Loan Amount

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What does your lender take into consideration to calculate your hard money loan? Here’s what you need to know.

How much could you get in a hard money loan?

At least 50% of your success as a real estate investor will come from using and understanding leverage well. Simply knowing your numbers gets you ahead of the curve.

You need to be able to figure out a ballpark number of what a lender will give you for your property. Let’s go over how to calculate your hard money loan, what costs you’ll need to know about, and run through some examples.

Calculate a Hard Money Loan: Maximum LTV

There are two main calculations for a hard money loan.

The first is: What is the maximum loan value a lender will offer?

Every hard money lender has a maximum loan ability. This maximum is based on the property’s after-repair value or ARV.

ARV is what the property will be worth at the appraisal when you sell or refinance. This is the number the property could go for on the open market after you’ve done all your renovations.

LTV vs ARV

Traditional lenders use “loan-to-value,” which means they base their loans on the cost of the property. 

But hard money is designed for real estate investing, so they lend with the assumption that your property is value-add. It’s a property that needs work, and when you put in the work, the home will be worth more in the future.

The after-repair value is what hard money lenders base their loan on. Most lenders will lend somewhere between 70-75% of the ARV. However, the actual loan-to-ARV percentage you get depends on factors like experience, credit, etc.

Most hard money lenders will only approve a loan for an amount you can actually afford. These lenders want two things:

  1. To get their money back.
  2. For you to make money.

75% ARV is the average amount they can lend safely. This amount estimates that you’ll be able to both pay all your costs and still make a little profit for yourself.

Max LTV for Hard Money Example

Let’s look at an example. We’ll keep it as simple as possible and say our ARV is $100,000. This loan amount is likely unrealistic depending on your market, but this calculation works the same with any number.

If $100,000 is our ARV, that means it’s the absolute maximum any hard money lender could loan you. In rare situations, a hard money lender may loan you up to 100% of your ARV.

More common, however, is that you get 75% of your ARV. To figure out this number, you just multiply your ARV by .75:

ARV  ×  % of ARV  =  Loan Amount

$100,000  ×  .75  =  $75,000

$75,000 is the realistic maximum loan you can expect from a hard money lender for a property with an ARV of $100k.

Calculating the loan-to-ARV for a hard money loan is only the first calculation, though…

Calculate a Hard Money Loan: Maximum Actual Loan 

If the first question is what is the maximum loan amount you can get, then the second question is: What’s the actual amount they’ll lend?

You might hear a hard money lender say they’ll lend up to “80/100” or “90/100” – let’s go over what that means.

How to Figure Out Actual Loan

You’ll notice there are two numbers with a slash in between.

The first number is the loan-to-cost (not ARV). For example, if it’s 90/100, that means they’ll lend up to 90% of what you bought the property for. 

The second number is the rehab cost. In the 90/100 example, the lender would give you 100% of the costs needed to fix up the property.

So in this case, they’ll offer you a loan that covers up to 90% of the purchase price and 100% of the rehab costs.

But remember: there’s still the overall maximum loan of $75,000 that we can’t go over.

Calculate Your Costs for a Hard Money Loan

So say a lender tells you they can loan 90/100 and 75% of the ARV, and your ARV is $100,000. That means they’ll give you 90% of the purchase cost + all the construction costs, but that total number can’t be more than $75,000.

Let’s break this down with some simple examples.

Don’t Forget Closing Costs

We’ll say we’re buying a property for $60,000, and it will take $20,000 to fix up.

There’s one more number many real estate investors fail to include here: closing costs. This number includes:

  • What you pay the title company, escrow attorney, or whoever performs the closing.
  • Lender origination fees.
  • Title costs.
  • Insurance.
  • Anything else that goes into the closing of a transaction.

Your closing costs will be dependent on your purchase price. For our $60k property, closing costs will be somewhere between $1,800 and $3,000. We’ll go with $3,000 for our example.

90/100 Hard Money Loan Example

Here are the numbers broken down for our current example. How do they work out for a 90/100 loan?

Purchase Price:  $60k

Rehab Costs:  $20k

Closing Costs:  $3k

Total:  $83k

Now, if the lender offers 90% of the purchase price, they’d cover $54,000 on this property. That leaves $6,000 (aka, 10%) you’ll have to cover.

They’ll also pay for 100% of the $20,000 construction costs. So as long as you stay in-budget, there will be no out-of-pocket costs there.

A hard money loan covers no closing costs. You’ll need to fund all $3,000 there.

Here’s what we’re left with:

Loan Covers:  $74,000

You Cover:  $9,000

Now you know going in that you’d need $9,000 to make this deal work. 

You can also see that the $74,000 is less than the max LTV of 75% (or $75,000 on this case). But what if our rehab costs were actual going to be $25,000 instead of $20k?

This would push our loan coverage up to $79k. The loan would still only cover $75k, so you’d be stuck with an extra $4,000, totaling your out-of-pocket cost for this property to $13,000.

80/90 Example

To really drive this home, let’s go through the exact same example but with an 80/90 loan.

If the purchase price is still $60k, they’ll give you 80%, so:

$60,000  ×  .80  =  $48,000

Rehab costs are still at $20k, so now the loan would cover:

$20,000  ×  .90  =  $18,000

The total loan amount would be:

$48k  +  $18k  =  $66,000

Your total costs would be:

Purchase:  $12,000

Rehab:  $2,000

Closing:  $3,000

Total: $17,000

For a 80/90 loan, you’ll need to bring in $8,000 more than you would a 90/100 loan.

Other Factors in Calculating a Hard Money Loan

This is a very basic way to calculate your hard money loan. Keep in mind these numbers will shift a bit depending on your qualifications, experience, and credit score.

But even a ballpark number keeps you prepared. And the better prepared you are money-wise, the better terms you can get.

Additional Costs on Your Property

The costs of real estate investing can add up. This is why it’s important to know before closing on a loan – or even before approaching a lender – what you can truly afford.

One more cost that’s easy to lose sight of in the midst of leverage is the carry costs once you actually own the property.

You’ll be paying interest and principal every month, plus the accumulation of taxes, insurance, and potentially HOA costs. These are all amounts that will be coming either out of your pocket or from gap funding sources. 

More Info on Calculating Hard Money Loans

We hope this helps you as you navigate your real estate investment career. Our purpose is to make sure you use hard money correctly, knowledgably, and in the right positions.

Be sure to check out our YouTube channel for more real estate investing breakdowns.

If you have any questions, or a deal you’d like us to run the numbers on, we’d be happy to help. Email us at Info@HardMoneyMike.com.

Happy Investing.