Does Your Real Estate Loan Cover All of Your Costs?

Hey everyone, it’s Mike with Hard Money Mike! When you’re planning to invest in real estate, one of the most important questions to ask is: does your real estate loan cover all of your costs? Today, we’ll dive into what goes into your loan, how to verify it, and how you can make sure you’re covered.

What Goes Into Your Loan Amount?

When you’re dealing with real estate loans, it’s easy to know your loan amount. But the real question is, what can fit under that loan amount? Let’s break down what could be included to ensure you’re not caught off guard by unexpected costs.

The Basics: ARV and LTV

Two key numbers determine the maximum loan available for your property:

1. After Repair Value (ARV): This is the value of your property after all repairs and improvements. It’s the price you expect to sell it for or its value when you refinance.
2. Loan-to-Value Ratio (LTV): This is the percentage of the ARV that a lender is willing to lend you. Most lenders offer between 70% to 75% of the ARV.

Example:

Let’s say you have a property with an ARV of $200,000. If your lender offers an LTV of 75%, they’ll lend you $150,000 (which is 75% of $200,000). Now, the question is, will that amount cover everything you need?

Breaking Down the Costs

To figure out if your loan will cover all your costs, you need to look at the expenses involved in your project. Typically, these costs include:

• Purchase Price
• Rehab Costs
• Closing Costs

Let’s see how these add up in a real-world scenario.

Real-World Example: Are You Covered?

Imagine your total costs look like this:

• Purchase Price: $100,000
• Rehab Costs: $40,000
• Closing Costs: $5,000
• Total Costs: $145,000

With a maximum loan amount of $150,000 based on your ARV and LTV, you’re in good shape! Your total costs of $145,000 fit comfortably under the loan amount, so you won’t need to come up with extra money out of pocket.

But what happens if your costs increase?

What If Costs Go Up?

Let’s say your purchase price jumps to $120,000 while keeping the rehab costs at $40,000 and closing costs at $5,000. Your new total cost is $165,000. Since your loan maxes out at $150,000, you’d have to cover the extra $15,000 on your own.

Make Sure You’re Prepared

Understanding what fits under your loan amount can make a huge difference in your project’s success. If your costs exceed what your loan covers, you’ll need to have additional funds ready.

Tools to Help You

At Hard Money Mike, we offer free tools like the Loan Cost Optimizer to help you run these numbers. Use it to make sure your loan covers everything, so you’re not surprised by out-of-pocket expenses.

Have Questions?

We know this topic can be tricky, so if you have any questions, drop them in the comments below. We’re here to help you run through the numbers and make sure your next project is a success!

Stay Connected!

For more tips and tools to make your real estate investments easier and more profitable, check out our website at: HardMoneyMike.com. Don’t forget to like, comment, and share this article with other investors! 

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