June 23, 2024

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Does LTV Matter On A Hard Money or Bridge Loan?

Both hard money and bridge loans are valuable tools to property investors, land developers, builders, and business owners. But they do come with their own learning curve. Hard money and bridge loans are quite different from their conventional counterparts. And yet, they share some similarities – like LTV ratios.

Salt Lake City’s Actium Partners says it is not unusual for clients to ask whether or not LTV (loan-to-value) matters on a hard money or bridge loan. In a word, yes. Lenders establish LTV ratios for the simple fact that hard money loan approvals are based mainly on the value of the asset in question.

More About LTV

LTV encapsulates the value of a property in relation to how much a person wants to borrow. It is expressed as a ratio. Lenders rely on LTV to help determine how much they are willing to lend on a particular property. Let us use a fictional LTV of 60%.

Imagine a property investor attempting to purchase a new piece of property valued at $1 million. At an LTV ratio of 60%, his lender is only willing to write a loan for $600k – or 60% of the property’s total value. The borrower will have to come up with the remaining 40% ($400k) through some other means.

LTV Protects Lenders

Lenders employ the LTV principle for their own protection. They do not want to foot the entire bill for whatever the borrower is working on. Doing so would be too risky. So instead, they force the borrower to put some skin in the game by only financing a certain portion of the project’s value.

Hard money lenders tend to have lower LTVs than their conventional counterparts. This is due to the fact that the loans they write are considered riskier. A lower LTV helps manage risk more effectively. And in the event that a loan does go south, a lender stands a greater chance of recouping its losses with a lower LTV.

A private lender’s LTV could be as low as 50%. On average, most private lenders do not go any higher than 75%. Somewhere between 60-70% is typical.

Differences in How It’s Calculated

One of the more unique aspects of hard money and LTV is how LTV is actually calculated. Actium Partners is a lender that does not get involved in rehab projects. Therefore, they are not interested in what is known as after repair value (ARV). They base LTV on the value of the property at the time it is being acquired.

There are other hard money lenders more than willing to invest in rehab projects. They may base their LTV on the future value of the property, after rehab is complete. It is really a personal preference thing. In fact, this is one of the beautiful things about hard money. Hard money is private money. Lenders are free to structure their loans as they see fit.

You’ll Never Get 100%

One final note on hard money and LTV: you will never get a 100% LTV on a hard money loan. On very rare occasions you might get 80-90%, but no hard money lender in his right mind will fully finance the acquisition of a new property. There is just too much risk involved.

Yes, LTV matters on hard money and bridge loans. LTV represents the amount of risk a lender is willing to take by limiting the amount of money being loaned. The higher the LTV, the more risk a lender is willing to take. The opposite is also true. In hard money though, LTV tends to be lower compared to conventional lending.