Understanding Hard Money Loan to Value Ratios
Are you on the fence about getting a hard money loan?
Some real estate investors are hesitant to seek these types of loans. They’re worried about high-interest rates, fees, and trickery.
By learning the basics of hard money, you can avoid the most common lender tricks and deceptions. Take a few minutes to complete hard money 101 before you seek a hard money loan.
Before you start searching for a hard money loan in Pennsylvania, or any other state, you should understand how value ratios work. This is the amount the lender will lend based on the value of the property.
For example, most lenders will lend up to 60-75% of the current value of the property. This is the loan to value (LTV). In addition to the LTV, Lenders will also look at your loan to cost (LTC) and compare the loan they are giving you to the total cost of the project. Most lenders will lend 70%-85% of cost.
What if you need to obtain capital to not only purchase the property but to renovate it as well? Along with the LTV, there is the “after repair value”. The ARV is the estimated value of the property after these improvements.
Again, the amount that a lender will lend varies. At Legacy Capital in Pennsylvania, you can get up to 60% of the ARV, depending on the situation.
Why don’t they offer 100% of the LTV or ARV? There are hard money lenders willing to cover the total cost. But, this increases the risk of their loan.
To cover this risk, you can expect much higher interest rates on a loan that is already likely to have a higher interest rate. This could negate your chances of turning a profit from the project.
Transparency is Essential – Know Your Upfront Costs
One of the ways that lenders attempt to use deception is by hiding their process behind complicated contracts and legal work. A lack of transparency means that there’s something to hide.
A dependable lender won’t use this deception. They should be transparent in all aspects – including your upfront costs and the fees involved in the loan.
It’s these fees that often result in unexpected costs. This can have a detrimental effect on your bottom line. If the fees exceed your expectations, you might not make as much from the real estate deal as you had planned for.
Pay attention to the following fees:
- Commitment fee
- Points
- Interest rates
- Underwriting fee
- Junk Fees
- Construction draws / Inspection Fees
Commitment Fee
The commitment fee is one area where unscrupulous lenders attempt to extort more money. The commitment fee should cover the appraisal. The leftover balance should get credited at closing.
Interest Rates and Points
Next, you need to consider the interest rates and points. This will vary from lender to lender. As mentioned, you’re likely to get a higher interest rate compared to a conventional loan.
The average interest rate for a hard money loan in Pennsylvania is between 10 and 15%. Points may range between 2 and 4. But, both interest rates and points can vary depending on the LTV or ARV.
The points are of concern when avoiding common lender tricks. Typically, points are calculated as a percent of the total loan.
But, a lender could simply offer points without detailing other fees, such as underwriting. This is a major area where a lender could attempt to draw extra money from your pocket.
Each point is 1% of the total loan. For example, let’s say you get a $500,000 loan and the lender charges 4 points. The total needed would then be $20,000, which may or may not include the underwriting fee.
The underwriting fee is typically charged as a flat dollar fee. The average range is between $750 and $2500. Though, this varies from lender to lender.
Remember, the underwriting fee is typically not included in the points. This is a fee that you don’t want to be blindsided by. You should be aware of these details before you agree to a loan.
Understanding Construction Draws
Construction draws refer to the need for funds to cover rehab for your property. Let’s say that you need to draw on your loan to cover some repairs.
For example, you’ve got $60K in repairs and have divided the construction projects into 4 separate $15K jobs. After the first job is completed, the lender will send someone to complete an inspection and verify the work was completed.
The lender may charge a construction draw fee for each of these draws. Depending on the size of your loan, these fees can be inconsequential. But if you’re not careful, especially on smaller loans, you could end up paying a significant amount of construction draw fees.
Make sure that you review all the details of a loan agreement before signing. Review all fees involved, including the fees discussed.
Seeking a Reliable Hard Money Lender in Pennsylvania
Hard money lenders are available throughout the country. But, if you’re specifically looking for a lender for a real estate venture in Pennsylvania, then you should look for a lender with knowledge of the local real estate market.
Learn more about the lending options available from Legacy Capital. Allow experienced lenders to walk you through the lending process and fully explain their fees and costs – with complete transparency.