Those seeking to borrow money to make a real estate purchase or another type of investment can turn to hard money loans as a feasible, solid solution. There are many reasons to make this decision. Key among them is the loan to value requirements available through hard money loans. Also known as LTV, this is one of the key features that can make all the difference in a home buyer’s buying power.
What Is LTV?
LTV is the amount of the loan borrowed compared to the value of the property. In a traditional, government-backed loan, most lenders want to see this a significant amount of free equity in the property. That is, they want to secure loans that are worth significantly more than what the borrower needs to purchase them. The problem here is that to achieve this, most borrowers must have a significant down payment. That down payment can be hard to obtain.
In a hard money or private loan, this level may be slightly different. Most offer a 70 percent LTV. However, more extensive and higher LTVs are also available to some borrowers. What makes a hard money loan different is that there are fewer other restrictions and more flexible lending requirements available on these loans.
Whenever possible, borrowers should secure the purchase they make with a down payment. It reduces risk. It also helps to improve a property ownerâ€™s investment in that real estate. It creates built-in equity. But, it also helps private lenders to feel more confident lending to those who do not otherwise qualify for a loan.
What Is the Valuation Method?
To determine what this ratio is, home buyers must secure an appraisal. This is the most common valuation method. An appraiser is a third-party professional not affiliated with the investment or any party within it. This appraiser uses market information to determine the current value of the property. This can change over time. It definitely changes when the home has significant renovation. This method allows for a clear, non-biased opinion of the propertyâ€™s value to be understood. With this information, it is clear if the loan is ideal for any investor.
What Other Parameters Are Present in These Loans?
Every private loan will have specific parameters. These are requirements the borrower or the property must meet in order for the investment to occur. Most loans will require a lien position, for example, of the first or second position. That means that the loan must be the only or potentially the second lien or debt on the home.
Other factors to consider include the interest rate, origination fees, loan term, and document processing fees. Loan types can differ from one provider to the next with options such as owner-occupied loans, fix and flip, rehab, commercial, and construction loans being available through hard money lenders.
Key Advantages of Private Loans
The loan to value component of any private money loan is just one factor. Individuals considering the investment in these loans need to realize the other advantages as well. Typically, the loans offer affordable interest rate, loan amounts that are sizable (to fit most needs well beyond that which is required by other lenders) and offer a variety of fast-closing opportunities. These loans typically can be used for most types of real estate including single family properties, residential developments, small commercial properties, and apartments.
Hard money loans provide a wide range of benefits to buyers. This includes access even when creditworthiness may be a concern. Though there are qualification requirements, buyers typically benefit from these loans.