ARV vs Purchase Price: How Lenders Calculate Your Maximum Loan
Quick Answer
Lenders calculate loan size using three numbers: purchase price, rehab budget, and ARV (after repair value). The typical rule is Maximum Loan = 70-75% of ARV. The loan is also capped at 85-90% of purchase price plus rehab costs.
Table of Contents
How Lenders Calculate Your Maximum Loan
Fix and flip lenders calculate your loan using two constraints applied simultaneously:
Constraint 1: Loan-to-Cost (LTC) Maximum Loan = 85-90% of (Purchase Price + Rehab Budget)
Constraint 2: Loan-to-ARV Maximum Loan = 70-75% of After Repair Value
Your actual loan is the lower of these two calculations. This dual-constraint approach protects both the lender and borrower from overleveraging.
For a deeper explanation of these metrics, read LTV vs LTC vs ARV LTV: Understanding Real Estate Loan Leverage.
Step-by-Step Calculation
1. Determine Your Purchase Price
This is the contract price you are paying for the property. Lenders verify this against an as-is appraisal to ensure you are not overpaying.
2. Estimate Renovation Costs
Create a detailed rehab budget broken into line items. Lenders require contractor bids to support your cost estimates. A detailed scope of work strengthens your application.
3. Identify Comparable Sales
Find recently sold, renovated homes near your subject property that support your projected sale price. The best comps are:
- Within 1 mile of the subject property
- Sold within the last 6 months
- Similar in size, style, and finish quality
4. Calculate ARV
Based on comparable sales, estimate what your property will sell for after renovations. An appraiser will formally verify this value during the loan process.
5. Apply Lender Limits
Run both calculations and take the lower result.
Example Calculation
| Item | Amount |
|---|---|
| Purchase price | $180,000 |
| Rehab budget | $70,000 |
| Total project cost | $250,000 |
| ARV | $360,000 |
LTC calculation (90%): $250,000 x 90% = $225,000
ARV calculation (75%): $360,000 x 75% = $270,000
Maximum loan: $225,000 (the lower of the two)
In this example, the LTC constraint is the binding limit. The investor would need to bring $25,000 in equity to closing (plus closing costs).
What Happens When ARV Is the Binding Constraint
In deals where the purchase price is very low relative to ARV, the ARV cap becomes the limiting factor:
| Item | Amount |
|---|---|
| Purchase price | $120,000 |
| Rehab budget | $40,000 |
| Total project cost | $160,000 |
| ARV | $200,000 |
LTC calculation (90%): $160,000 x 90% = $144,000
ARV calculation (75%): $200,000 x 75% = $150,000
Maximum loan: $144,000 (LTC is still lower here)
When ARV caps the deal, it usually means the property needs stronger comps or the purchase price is too high relative to the finished value.
How to Strengthen Your ARV Estimate
- Use recent sales: The more recent the comparable, the stronger it is
- Match the renovation level: Compare against homes with similar finish quality
- Stay within the neighborhood: Comps from the same subdivision are ideal
- Avoid over-improvement: Building the nicest home on the block limits ARV
- Document everything: Photos, MLS listings, and market data all support your case
For a complete guide to appraisals, see Fix and Flip Appraisals Explained: As-Is vs ARV.
Checklist Before Submitting
- Recent comparable sales (3-5 comps within 1 mile)
- Detailed contractor budget with line items
- Property photos showing current condition
- Market analysis showing demand in the area
- Your experience track record
Related Reading
Key Takeaways
- ✓ARV is the main driver of flip loan sizing
- ✓Lenders apply both LTC and ARV LTV caps — the lower determines your loan
- ✓Investors must verify comps carefully to support their ARV estimate
- ✓Conservative ARV estimates reduce risk and improve approval chances