Hard money loans can be a great option for homebuyers and real estate investors looking for a type of loan that is easier to qualify for than a conventional mortgage. This can be an exciting opportunity for many people. However, before your search for “hard money mortgage lenders near me,” you may want to understand loan-to-value ratio. This can have a big impact on your borrowing decision.
What Is Loan-to-Value Ratio?
Loan-to-value ratio is a simple concept. Most lenders want borrowers to have some “skin in the game” when borrowing against assets. So, you need to make a down payment. The ratio between the loaned amount and the value of the asset is the LTV ratio. For example, if you are borrowing to buy a house, you may have an LTV of 80% and a down payment of 20%.
In a sense, LTV ratio works the same no matter who you are borrowing from. It is almost always expressed as a percentage of the value of the property in question. However, setting a value for that property (and deciding which property the loan is borrowed against) can vary.
How Does LTV Work for Conventional Mortgages?
For a conventional mortgage, the rules are set by government regulations. Therefore, all conventional lenders have almost exactly the same setup. They must base their LTV on the lesser of the purchase price or appraised value. So, if you buy a home that is valued at $250,000 for $200,000 and have an 80% LTV, you would be able to borrow up to $160,000 (80% of the lesser value).
Although at first glance, conventional lenders appear to offer higher LTV ratios, the practical outcome may be different. This is because the ratio works differently for private money lenders for real estate.
How Do Hard Money Loans Differ?
Private and hard money lenders can choose what value they will base their LTV ratios on. This can have a huge impact on the amount you are able to borrow.
This is very relevant in the case of a fix-and-flip property, for example. You may only buy it for $100,000 but it could be worth $200,000 once you have fixed it up. The conventional mortgage lender may be able to offer you 80% on the $100,000 purchase price. However, a private money lender could offer you 70% on the $200,000 after-renovation value. You would get more with the lower LTV because of the number it is based on.
The value that the LTV ratio is based on varies depending on the type of loan. However, it is important to talk with your lender to understand which number you are borrowing against. In many cases, you can borrow more from hard money lenders than you would be able to through a bank.
Interested in hard money loans? Get in touch with one of the hard money lenders California residents turn to when they need money for their real estate purchases. When you learn the specifics of loan options for your project, you will be better prepared to make a well-informed decision.