Two lenders can look at the same flip and land $52,500 apart on how much they will lend, with neither of them doing anything strange. They are dividing the loan by different things. One measures it against what the project costs you, the other against what the finished house should sell for, and the amount of your own money you need depends on which one is sitting across the table.
Here is one house run both ways.
What does loan to cost mean?
Loan to cost is the loan divided by what the project costs. The example house is bought at $150,000 with a $45,000 rehab budget, so price and work come to $195,000. The loan is 15 percent down on the price with the rehab borrowed too, which is $172,500.
That is 88.5 percent loan to cost. The lender is covering almost nine dollars in ten of what the house and the work cost, and you are covering the rest.
One warning before you compare quotes. Lenders usually mean price plus rehab when they say cost, but a flip costs more than that. The calculator’s Total project cost line adds closing costs, holding costs, the cost of the money and the sale, which brings the example to $237,475. The same $172,500 loan is only 72.6 percent of that. Ask which figure the lender is dividing by, because the two answers are sixteen points apart on one deal.
What does loan to value mean on a flip?
Loan to value is the loan divided by what the property is worth. On a flip that value is the after-repair value, the price the finished house should bring. The example expects $275,000, so the same $172,500 loan is 62.7 percent loan to value.
Nothing about the deal changed between those two paragraphs. The loan is the same loan. It looks aggressive against cost and comfortable against value, because the gap between the two is the profit the deal is supposed to make. How to calculate ARV covers picking that number from sold comparable sales rather than asking prices, which matters here: every loan-to-value figure on a flip rests on an opinion of a house that does not exist yet.
Which limit lends you less?
Whichever one bites first, and on a deal with a wide spread that is usually loan to cost.
Say the lender caps at 80 percent of cost. That is 80 percent of $195,000, or $156,000, which is $16,500 less than the example’s loan. Now say the lender caps at 70 percent of after-repair value instead. That is $192,500, which is $20,000 more than the example’s loan, so the cap never comes into play. The cost limit is the one that decides the deal.
Flip that around on a thin deal, where the finished value is close to what you spent, and the value limit starts binding first. Both limits are worth asking about, because a lender who quotes you only the flattering one has told you very little.
What happens when the rehab is not in the loan?
Your cash goes up by more than the rehab budget. The second lender below stops at 80 percent of the purchase price and lends nothing against the work, so the loan is $120,000 and the $45,000 rehab comes out of your pocket.
| Rehab in the loan | 80% of price only | |
|---|---|---|
| Down payment | $22,500 | $30,000 |
| Closing costs at purchase (2%) | $3,000 | $3,000 |
| Rehab paid from your own cash | – | $45,000 |
| Loan points (2%) | $3,450 | $2,400 |
| Interest for 6 months at 10% | $8,625 | $6,000 |
| Holding costs ($900 a month for 6 months) | $5,400 | $5,400 |
| Your cash in the deal | $42,975 | $91,800 |
These are example figures, not a forecast for any market.
The second loan asks for $48,825 more of your money on an identical house. Look at the points and the interest, though, and the smaller loan is cheaper to carry: $8,400 of points and interest instead of $12,075, because you are borrowing $52,500 less for the same six months.
That shows up in the profit. The example clears $37,525 on the bigger loan and $41,200 on the smaller one. The smaller loan wins on profit and loses badly on return, 44.9 percent on your cash against 87.3 percent, and it ties up more than twice as much of it. How hard money loans work goes through the points and the interest-only carry that produce those figures.
How do you enter a lender’s quote in the calculator?
The fix and flip calculator has no loan-to-cost box. It asks for a Down payment as a percent of the purchase price, and a switch for whether the rehab is included in the loan. Converting a quote takes one subtraction.
For the second lender, 80 percent of the price and nothing toward the work: enter 20 percent down and turn the rehab switch off.
For an 80 percent loan-to-cost quote with the rehab financed: the loan is $156,000, the $45,000 rehab uses part of it, so $111,000 is lent against the $150,000 price. That leaves $39,000 of your own money on the price, which is 26 percent down with the rehab switch on. The calculator then prints $58,320 of cash in the deal and $38,680 of profit.
Work the conversion the lender’s way, not yours. A quote of “80 percent” with the rehab excluded and the same quote with the rehab included are two very different loans, and the switch is where that difference lives.
Does any rule cap either ratio?
Not one you can look up. Regulation Z, the rule behind the paperwork on an ordinary home mortgage, does not cover credit made “primarily for a business, commercial or agricultural purpose” (12 CFR 1026.3(a)). Its commentary treats credit to acquire, improve or maintain rental property that is not owner-occupied as business purpose “regardless of the number of housing units”, and adds that if the owner expects to occupy the property “for more than 14 days during the coming year” that treatment does not apply (comment 3(a)-4). Where a particular loan lands decides which rules come with it, which is a question for the lender and, if real money rides on it, an attorney.
So both ratios are policy, set by each lender, and the figures in this post are the example’s own assumptions rather than a survey of the market.
Ask for both numbers and for the cost figure behind the first one, then put the dollars into the calculator as a down payment percent plus the rehab switch and read the cash line before the profit line. A first flip, from offer to sale has the full cost stack those two ratios are carved out of, and the 70% rule is the quicker check to run on the offer itself.