LTV Ratios Still Play a Crucial Role in Hard Money Lending
Is there any type of funding as misunderstood as hard money? There is no way to know for sure, but the misunderstandings surrounding the hard money industry are numerous and profound. People have a lot of misconceptions that are fueled by misleading blog posts and news stories. For example, consider loan-to-value (LTV) ratios. These play a crucial role in hard money lending.
Unfortunately for the industry, hard money is often thought of as lending of last resort. It is often painted as predatory lending, too. That leads unsuspecting people to assume that hard money lenders will give money to anyone with a pulse, hoping that they will ultimately be able to swoop in and seize borrower assets at the earliest possible opportunity.
What many people do not realize is that hard money lenders are licensed and bonded companies that have to adhere to strict state and federal rules. Utah‘s Actium Partners say that hard money lenders doing things by the book are not predatory. They work on established criteria that includes LTV ratios.
What LTV Really Means
The term ‘loan-to-value ratio’ is little more than a fancy term to describe how much money a lender will lend in a given scenario. The simplest way to understand LTV is to see it as a percentage of the total amount needed. It works the same in both hard money and traditional lending.
Let us say you are real estate investor hitting up Actium Partners for a loan to buy property in Salt Lake City. Let’s also say that the property is listed at $100,000. For the purposes of approving your loan, the property’s list price is its value.
Now, imagine that Actium’s LTV is 50%. That means they will loan you 50% of the property’s value, or $50,000. Simple enough. A 50% LTV says that the lender will loan you half of what you need. You will have to come up with the other half through some other means.
Why It is Crucial to Hard Money
LTV ratios are utilized for all sorts of lending. If you buy a house for example, your lender is not likely to finance 100% of the cost. The bank will almost certainly require at least a 10% down payment. You might even be required to bring 20%. At 20%, the bank’s LTV is 80%.
Hard money lenders work on the same principle. However, LTV is a lot more important to them because their loans are asset-based. In other words, hard money lenders do not consider a borrower’s credit rating or history, their income, or most of the other things that banks look at. Hard money lenders make loans based on the strength of the borrower’s proposed asset.
To a hard money lender, LTV is a way to contain risk based on asset value. If a hard money lender never offers an LTV higher than 50%, it minimizes its own risks by requiring that borrowers put significant skin in the game. A 50% LTV also greatly increases the chances that the value of the asset in question will more than cover the loan in the event of default.
To tie all of this together, it is simply not true that hard money lenders have no standards. It’s not true that they are predatory lenders looking to rob their borrowers blind. A licensed, bonded hard money lender utilizes established criteria that includes LTV ratios. Furthermore, a lender’s LTV plays a crucial role in managing risk. Hard money lenders do not want to be stuck with defaulting borrowers any more than banks do.