Foreclosure problems can put a damper on your home-ownership endeavors. Want to avoid default? Start by understanding how hard money works.
So, how are hard money loans structured? What are the hard money loan requirements? The examples in this article will help you understand the basics.
For starters, your entire property will be used as the loan collateral. Depending on your lender, the hard money loan will cover 60% to 70% of the property’s current market value or ARV (After Repair Value).
Here’s the basic formula:
Buying Price (Loan Value) = ARV * 70% - Holding cost - Repairs
(This is the maximum purchase price. You may buy for less)
You want to buy a house selling for $120,000. Its ARV is $140,000. Ideally, the hard money loan will cater for 70% of $140,000; i.e. $98,000. This means you will need to fetch another source for the remaining $22,000.
Like a bridge loan, a hard money loan offers funds for short-term expenses. You must be willing to pledge your property as security against default. The value of your real property is the basis for the amount of money you want to borrow.
Your credit history doesn’t matter in this case.
Loan to Value Ratio (LTV)
Hard money lenders use the LTV (Loan to Value) ratio of between 60-75 percent; though each lender is different and willing to accept higher or lower ratios. That’s why you get $60,000 if you use your real estate worth $100,000 as security. The LTV is basically the loan value divided by the appraisal value of your real estate property.
If the LTV is too high, it will be difficult to get a hard money loan. In a nutshell, the loan to value ratio represents the risk for the lender.
Suppose you want to pay your bills amounting to $60,000 but your paycheck has delayed. With a poor credit score, your loan application will be rejected by banks and other traditional lenders.
Luckily, you have home equity valued at $90,000. If you approach a hard money lender, they will calculate your LTV to 60,000/90,000 = 0.67 (67%). With regards to the protocols the money lender uses, you may get 67% of your home value.
In this case, you would be eligible for 67% * 90,000 = 60,300. That will help you clear the entire bill! You won’t need to approach another lender.
The reason hard money loan rates are a bit high is that the lenders assume higher risks. But don’t get it twisted. This is not a home equity loan which is based on the home value and credit score.
A higher rate is not a disadvantage at all. It is something every business owner should know. When you need quick capital for your venture, you can quickly connect to hard money lenders all across the country on our platform by answering a few quick questions.