How Do Lenders Determine a Hard Money Loan Amount?
Hard money loans can be a great resource for real estate investors. Whether you need to get a loan fast, don’t qualify for traditional financing, or need to bridge the gap between loans, hard money loans can help. That said, every lender operates a little differently, and loans are specific to your needs and goals as an investor. So, how do lenders determine a hard money loan amount? Today, we’ll discuss how.
Contents of This Article:
- When Would You Need a Hard Money Loan?
- How Do Lenders Determine a Hard Money Loan Amount?
- How to Increase Your Chances of Getting a Loan
- Find the Right Lender for Your Investment Property
When Would You Need a Hard Money Loan?
There are several instances where a hard money loan could be helpful. Investors use hard money loans for various reasons, whether you’re looking for a short-term loan or don’t qualify for traditional financing. Here are some examples of when a hard money loan may be useful.
- Fix-and-Flip Investments- Many traditional lenders won’t finance fixer-uppers, so hard money loans can be great if you’re buying a distressed property to renovate and sell quickly.
- Unconventional Properties- Some properties don’t qualify for traditional loans, such as mixed-use, commercial, or other unique properties. Baltimore hard money lenders are often willing to fund these properties, as they focus more on the value rather than strict guidelines.
- Borrowers With Less-Than-Ideal Credit- Even if your credit isn’t good enough to get a traditional loan, you can still qualify for a hard money loan.
- Bridge Loans- If you need short-term funding before securing a long-term loan, hard money loans can bridge the gap between financing options.
- Investors Needing to Close Fast- Hard money loans close within a matter of days, unlike conventional mortgage loans, which can take weeks or months. This is great for investors who want to secure deals quickly.
How Do Lenders Determine a Hard Money Loan Amount?
Generally, lenders determine a hard money loan amount by looking at the value of the property being used as collateral. Unlike traditional mortgage lenders, they don’t focus too much on your credit history but care more about the potential of the property and your ability to repay the loan using the profit you make from the property. Here are some of the main factors a lender looks at when determining a loan amount.
- Loan-to-Value (LTV) Ratio
- After-Repair Value (ARV)
- Property Type and Market Conditions
- Borrower’s Down Payment and Equity
- Exit Strategy
- Loan Terms and Fees
Loan-to-Value (LTV) Ratio
The main factor that hard money lenders use to determine your loan amount is the loan-to-value (LTV) ratio. This is calculated as the total loan amount divided by the value of the property used to back the loan. The higher the LTV, the higher the lender’s risk, and they typically offer around 60% to 75% of the property’s current market value. For instance, if a property is worth $200,000 and a lender offers 70% LTV, the max loan amount would be $140,000.
After-Repair Value (ARV)
Lenders may offer loans based on the after-repair value (ARV) for fix-and-flip property investments. That said, common ARV loans range from 65% to 75% of the projected post-renovation value. For instance, a property with $300,000 ARV and 70% ARV financing could secure a $210,000 loan.
Property Type and Market Conditions
Another factor that lenders look at when determining a hard money loan amount is the property type and real estate market conditions. For instance, they’ll look at the location, demand, and resale potential of the property you’re looking to finance. With that, they’ll consider the type of property, as they may have different terms for residential, commercial, and mixed-use properties.
Borrower’s Down Payment and Equity
The larger the down payment, the lower the risk for the lender. Generally, lenders want to see a down payment of at least 20% to 40%. Additionally, if a borrower has existing equity in a property, they may qualify for a larger loan.
Exit Strategy
Your exit strategy is one of the most important factors when it comes to qualifying for a hard money loan. That said, a strong exit strategy can also lead to a higher loan amount, depending on the type of property you’re financing. Exit strategies may include selling the property, refinancing with another loan, or using rental income to pay off the loan.
Loan Terms and Fees
Finally, each lender has their own structure in terms of interest rates, origination fees, and closing costs. Several factors go into their loan terms, like the property type, market conditions, interest rates, and more. So, your overall loan amount can differ depending on your investment plan.
How to Increase Your Chances of Getting a Loan
Getting a hard money loan isn’t too hard for most investors. However, there are certain things you can do to increase your chances of getting good loan terms. Here are a few examples.
- Improve Your LTV Ratio- One of the best ways to increase your chances of getting a loan is by providing a large down payment. After all, a lower LTV makes your loan less risky for the lender.
- Choose the Right Property- Lenders generally prefer properties in stable or growing real estate markets, as it’s usually easier to sell the property for profit in those areas.
- Have a Clear Exit Strategy- Lenders need to see a realistic plan for repaying the loan. For instance, fix-and-flip investors should provide a detailed plan and timeline for renovations.
- Strengthen Your Finances- Your credit score doesn’t hold that much weight when it comes to qualifying for a hard money loan. However, a better score can give lenders confidence that you can repay the loan.
- Negotiate Loan Terms- Finally, knowing that you can negotiate hard money loan terms is important. Most lenders will work with you to find terms that benefit both parties.
Find the Right Lender for Your Investment Property
How do lenders determine a hard money loan amount? Knowing what factors go into a lender’s decision and what they look for in a borrower can help you secure the best terms for your investment. You’ll want to provide a significant down payment, lay out your plans for renovations, and improve your financial standing to get the best loan possible.
If you’re looking for a hard money loan for a property investment near Baltimore, look no further than Maryland Hard Money Lenders. Our team of loan professionals can help you get funded quickly and efficiently. Learn more about our lending process or fill out our initial loan application today!
