There is a lot about hard money that the average consumer does not know. Some of it is due to ignorance, but some of it is also due to misinformation produced by people and organizations that don’t have a high opinion of hard money. For example, there is a misconception that hard money lenders don’t much care about loan-to-value (LTV) ratios.
Actium Partners, a Salt Lake City, UT hard money lender, says that nothing could be further from the truth. LTV is as important to hard money lenders as any bank or credit union. Without accounting for LTV, a hard money lender can never truly understand the risk involved in a given opportunity.
A Brief Explanation
The LTV ratio is essentially the difference between the value of the targeted property and the amount of money being loaned. It is expressed as a percentage of the property value. This can be easily illustrated by sticking with simple numbers. Let us assume a hard money lender with a 50% LTV on most transactions.
If you were to approach that firm looking to buy a property listed at $100,000, you would be looking at a $50,000 loan, maximum. But that’s only if the property’s appraised value is equal to, or greater than the list price. The amount of money you could borrow would decrease if the appraisal came in the lower. Regardless, you would have to fund the remaining amount in some other way.
Lower Than Traditional Lenders
The next thing you should know is that most hard money lenders work with LTVs that are lower than traditional lenders. Some hard money lenders will not go above 50%. A few get as high as 65%. Rare is the hard money lender with an LTV of 75% or higher.
There are two reasons explaining hard money’s lower LTVs. First and foremost is risk. By its very nature, hard money lending is more risky than traditional lending. Its risk is found in the fact that hard money lending is asset-based lending. One of the ways lenders try to mitigate their risk is keeping their LTVs low.
The other reason for the lower LTV is to force borrowers to take a bit more risk themselves. Lower LTVs require borrowers to put more of their own money into the deal. They need to have more skin in the game, so to speak. That helps spread the risk a bit more evenly between lender and borrower.
LTVs Are Sometimes Negotiable
There is another common misconception that hard money lenders are tough business owners who never give an inch. Again, not true. The industry does not necessarily make a point of advertising lender flexibility, but that doesn’t change the fact that many lenders are quite flexible. This relates to LTVs in the sense that sometimes they are negotiable.
A lender might go into a new deal with a 50% LTV in mind. But if circumstances warrant, that lender might be willing to negotiate. He might be willing to offer a 65% LTV in exchange for a couple of extra origination points, for example. LTVs are not set in stone. For that matter, very little of what constitutes hard money lending is.
Do not believe the myth that says hard money lenders don’t care about LTV ratios. They do. Setting a standard LTV is necessary to mitigate a lender’s risk. By the same token, lending without an LTV exposes hard money lenders to significant losses. They are not going to let that happen, which is why lenders tend to be very particular about their LTVs.