Are you thinking about using a hard money loan to finance your business? Whether you’re a property developer, a real estate “flipper” or simply a real estate investor, hard money loans offer an attractive alternative to traditional bank loans. You don’t have to worry about credit. Because they are secured by real property, hard money loans are offered to all businesses — including those with no credit or bad credit. When pursuing a hard money loan, you should consider the loan-to-value (LTV) ratio.
Loan-to-Value (LTV) Ratio for Hard Money Loans: What You Should Know
What Is LTV Ratio?
LTV ratio refers to the size of a hard money loan relative to the quick-sale value of the property used to secure it. All hard money loans require collateral. They are classified as secured loans and, like all secured loans, they are backed by collateral. Hard money loans simply involve the use of real property as collateral.
When you obtain a hard money loan, the amount won’t be the full value of the real property that you used to secure it. Rather, the value of the hard money loan will be a smaller amount, which is represented by the LTV ratio. Expressed as a percentage, the LTV ratio is the amount of the hard money loan relative to the quick-sale value of the real property used as collateral.
Why LTV Ratio Is Important for Hard Money Loans
You shouldn’t agree to a hard money loan without considering the LTV ratio. LTV ratio is important because it represents the amount of a hard money loan relative to the collateral value.
If a hard money loan has a low LTV ratio, you won’t get as much money from it as you would with a hard money loan that has a high LTV ratio. The value of the collateral will remain unchanged. A low LTV ratio simply means that the lender is allowing you to borrow less money based on the value of the collateral.
What’s a Typical LTV Ratio?
Unless you’re familiar with hard money loans, you might be wondering what a typical LTV ratio is. LTV ratios can vary. Some hard money lenders offer higher LTV ratios than others. With that said, the industry average ranges from 35% to 50%.
An LTV ratio of 35% means that the amount of the hard money loan will be 35% of the collateral value. If the quick-sale value of the collateral is $100,000, the amount of the hard money loan will be $35,000.
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