Updated: Jan 12, 2022
If you’re considering taking out a hard money loan, you might be wondering how hard money lending in Texas works.
To determine loan amounts, rates, and other information, your private money lender in Texas focuses on the loan to value (LTV) ratio. This is a term you will often hear that is commonly used in lending, whether you’re a borrower or a lender, so pay close attention.
What is Loan to Value (LTV)?
The Loan to Value compares the loan amount to the value of the property. The approval is based on this metric which makes the approval process for asset-based loans quick and easy, making it a great solution for real estate investors in Texas who want to close quickly on a property.
The LTV Formula
Calculating LTV is really just very simple math. This metric is calculated as the total loan amount divided by the value of the property used to back the loan.
LTV = Loan amount / Property value
How does LTV affect interest rates?
Interest is heavily dependent on the lender and the risk involved in the loan, which is factored in the loan-to-value ratio (LTV).
✖ The higher the ratio > more risk to the lender > higher associated fees & interest rate
✔ The lower the ratio > lesser risk to the lender > lower cost of the loan & interest rate
To manage this risk, lenders set a maximum loan-to-value (LTV) ratio. Lenders have the ability to wave down payment requirements if the loan is below the max loan to value (LTV) ratio.
LTV for hard money
Hard money loans are not backed primarily by borrowers’ credit rating, assets, or equity. While all of the above can be part of the equation, the main collateral is the property being purchased itself and since they require less documentation, must close quickly, and usually are on properties that need repairs, this makes this type of loan riskier to lenders. Because of these factors, hard money loan LTVs are usually between 60-75% of the total property value depending on the lender and product.
The “Value” in the LTV of hard money loans is not the same as the market value used by banks. Instead, it is somewhat lower, being based on what the lender could expect to get for the property in a one to four-month selling time.
Such loan options are popular among real estate investors for their higher flexibility, less extensive documentation procedures, fast approvals, and because they are sometimes the only option for securing funds.
Why is it Important?
The LTV ratio is important to lenders or investors because it helps them numerically express the strength of the loan.
Hard money lenders will always want to determine the LTV (loan to value) prior to making any extension of financing because the primary basis for making a hard money loan is the liquidation value of the collateral backing the note.
How is it determined?
With most hard money lenders, the LTV is determined through either:
a broker’s opinion of value
underwriting the property
In hard money lending, an independent appraisal done by a licensed appraiser in the state in which the property is located or a broker’s price opinion (BPO) might be hired by these lenders to assess the property and estimate what the potential appraisal value of a property might be. These brokers assist with the hard money approval process simply because they can provide a quicker answer than a traditional appraisal, enabling the lender to more quickly approve the loan application. The high cost and delay associated with opting for an appraisal are more likely to slow down the approval process and negate one of the greatest benefits of hard money loans: quick funding.
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