Obtaining a hard money loan is not as cumbersome with regards to requirements as obtaining a loan from a bank. The common misperception, however, is that there are no requirements when getting a hard money loan. In this post we will look at the main requirement that most hard money lenders consider when deciding to make a loan or not.
The first requirement any hard money lender will look at, and perhaps the most important one, is the loan to value ratio. The higher that ratio is, the more risk there is involved with making the loan. The equity in a property is the protection that the investor has against a default, so of course the more equity that is left after the loan is made, the better the chances are that an investor will write a check for that loan.
Typically speaking we like our LTV (loan to value) ratio to be below 60%. In some scenarios we can go to 65% LTV. Typically this is dictated by the location. San Francisco hard money loans are typically going to be able to carry a higher loan to value than say hard money loans in the Central Valley. The same is true for San Jose, San Diego, etc. The common theme here is areas that have held their value well through the latest real estate downturn are areas where we can get more aggressive in terms of loan to value.
Another aspect that is directly related to the loan to value ratio is the interest rate that you will pay on the loan. Again, the lower the loan to value is, the more attractive the loan is to the end investors. When we can make these loans more attractive, we have more leverage to secure a lower interest rate. The rate difference between a 60% LTV loan and a 49% LTV loan can be 2-3% or more. Again, location does play a part in this as well. A more desirable location is going to help with regards to rate, although not quite as much as a lower loan to value ratio would.
To figure this important ratio you simply take the proposed loan amount and divide it by the value of the property. Typically speaking we will value a property through an appraisal, although there are exceptions. On our hard money rehab loans, for example, we look at comps and a site visit is done in lieu of an appraisal. So if a property is appraised for $200,000 and you are looking for a loan of $100,000, you would divide $100,000 by $200,000 and you would get .5. Expressed as a percentage, that would be 50%, so the loan to value in this scenario would be 50%.
On an acquisition/rehab, fix and flip or construction/construction completion loan, our ratio is typically based on the ‘as complete’ or ‘after repair’ value. Using the same formula above, you can figure the loan to value on the ‘as complete’, ‘after repair’, or ‘ARV’ in the same manner, using the as complete value instead of the appraised value. Using this formula for these types of transactions allows more leverage in a deal, meaning a borrower can borrow more. In many cases, they can borrower even more than the purchase price, due to wrapping the cost of rehab into the loan as a fund control account. You can learn more by reading our California hard money rehab loans overview.
Of course these loan to value ratios are not the only requirement when obtaining a hard money loan. Although many hard money loans are based on these LTV ratios, there are other aspects that must be considered when making these loans. Check back in as we will be looking at these aspects in detail over the coming weeks.
For more information and to learn more, visit our site about California hard money loans.
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