When you apply for fix and flip loans Philadelphia, LTV (the loan to value ratio) and equity will be part of the consideration for approval.
Hard money lenders generally loan up to 60% LTV.
What does that mean?
Why is it so important?
What does it take for you to qualify for fix and flip loans Philadelphia?
If you are wondering about those things, you’ll love this mini-tutorial…
Defining LTV and equity
A loan to value (LTV) ratio describes the size of the hard money loan you take out compared to the value of the property securing the loan. The appraised value of the property will limit how much money you can borrow. Should you fail to repay the loan, the lender will be selling this property to get their money back.
Equity is the amount of money you have put into the property. In other words, both equity and LTV refer to the difference between what the property is worth and how much you owe (or will owe) on it. If you purchase a property worth $100,000 and owe $80,000 on it, your LTV is 80% and your equity is 20%. If you were buying your own personal home you would need to get your private mortgage insurance if you went higher than 80% LTV.
Lenders use LTV to determine how risky a loan is. The higher the LTV the more risk because the assets behind the loan are less likely to pay off the loan. Most fix and flip loans Philadelphia will are set at 60% LTV or less. This requires you to put at least 40% down for the property. For example, if your flip property is worth $100,000, you could be approved to borrow up to $60,000. If the owner accepted your purchase offer of $80,000, you might still be able to borrow up to $60,000 based on the appraised value of $100,000.
What it takes to qualify for fix and flip loans Philadelphia
Hard money lenders measure risk with the loan to value ratio (LTV) and many lenders set that risk at 60% LTV. Then they consider the 3 C’s: collateral, capability and credit.
The collateral is the property you’re looking to flip. But what if you’re not able to put in 40% equity and actually need to loan more money to make the deal work? Many private lenders will allow you to make up the difference, so to speak, through cross-collateralization. You bring other real estate that you own free and clear or other assets into the deal to secure the loan.
Capability is about the fundamentals of the fix and flip project you’re proposing. Is it a sound deal? Do you have the necessary experience to carry out the project successfully?
And while banks often weigh everything on your credit, hard money lenders will consider it alongside your capability and collateral.
Summary
Personally investing in the deal (equity) and knowing the lender’s risk tolerance (60% LTV) will prepare you for applying for fix and flip loans Philadelphia.