Turning Terms into Returns — Part 2: The Caps That Determine Your Maximum Loan
Every hard money lender puts a ceiling on how much they'll lend. There are two separate caps that do this — and they work very differently. Understanding which one governs your deal is the difference between accurate underwriting and a surprise at closing.
Max % Loan to ARV — The Universal Cap
Virtually every hard money lender caps the total loan as a percentage of after-repair value. A 70% ARV cap on a $428,000 ARV sets a maximum loan of $299,600 — regardless of purchase price or rehab budget.
This is the cap that governs most deals. As long as your project cost is reasonable relative to ARV, it won't be the binding constraint.
Max LTV — The Overall Project Cost Cap
Some lenders apply a second cap against total project cost — purchase price plus rehab budget combined. A 90% LTV cap on a $300,000 project sets a maximum loan of $270,000.
This cap is less common, but when it exists it interacts with the ARV cap in a way every investor needs to understand.
When One Cap Wins
The binding constraint is always whichever cap produces the lower number.
When project cost is well below ARV, the LTV cap typically produces the lower number and wins. But as purchase price rises relative to ARV — meaning the investor is buying closer to what the property will be worth after repairs — the ARV cap can become the binding constraint.
Here's the same property at different project costs, with an ARV of $428,000, a 70% ARV cap ($299,600 maximum), and a 90% LTV cap:
| Project Cost | LTV Cap Result | ARV Cap Result | Binding Constraint |
|---|---|---|---|
| $300,000 | $270,000 | $299,600 | LTV cap |
| $325,000 | $292,500 | $299,600 | LTV cap |
| $333,000 | $299,700 | $299,600 | Essentially equal |
| $340,000 | $306,000 | $299,600 | ARV cap |
At a $340,000 project cost, the ARV cap becomes the binding constraint — capping the loan $6,400 lower than the LTV cap would. That $6,400 comes directly out of your pocket at closing.
Knowing which cap governs your deal before you make an offer isn't optional. It's basic underwriting.
RE Data Metrix calculates both caps automatically and shows you exactly which one is binding on your specific deal — before you make the offer.
Analyze your next deal with RE Data Metrix →
Next in the series — Part 3: How the overall LTV cap creates a sliding scale that quietly reduces your purchase loan as your rehab budget grows.