What is the funding amount of a hard money loan based on?
Hard money lenders typically fund on a loan-to-value ratio (LTV), meaning they loan up to a certain percentage of the property’s current market value, typically 65-75%. Some may lend based on of the property’s after repair value (ARV), which is the expected value of the property after renovations are complete. This is a core component to hard money lending, because it allows lenders to fund loans for investors with less than stellar credit histories, since lenders are primarily concerned with the asset being financed rather than the borrower’s financial history.
How do hard money lenders evaluate assets?
Property valuation involves several different approaches. A typical hard money lender will assess an investment property the same way an investor would. The lender will want to know if there is enough money in the deal for the investor to not only make a profit, but to also be able to pay off the loan and associated fees.
Among the documents required in order to obtain a loan is an investment remodel plan. This is a key feature lenders will evaluate when deciding whether or not to finance your deal.
In this process, hard money lenders will examine the current specifications of the property including: lot size, home square footage, location, bedroom and bathroom count, etc. A savvy lender will then research various comparable properties in the area to find out the most desirable and attainable specifications for the renovated subject property. In other words, they will assess what needs to be done to this property in order to get it into market ready condition and create the highest profit potential. Many times there are several different renovation options for the same property. Each property is different and some investors will need larger rehab budgets than others. An experienced hard money lender will review your remodel plan and either approve it or advise alternative approaches that may yield more favorable results.
Once the remodel budget has been decided, the lender will assess what the property will sell for after it has been renovated. Typically this process includes finding recently sold properties that have similar specifications that the asset will have post-renovation. By comparing the sale price of these properties the hard money lender will have a better idea of what the property will likely sell for and can evaluate the profit margin.
Will a hard money lender reject you because of the property you want financed?
Many lenders, Intrust Funding included, refuse to finance investment properties that they do not believe will be successful. In the instance that an investor is rejected because of the property, it is a good idea for the investor to either request a second opinion or not purchase the property at all. While it may seem preferable to get a second opinion, the lenders that advise against purchasing a property are working in your best interest and are not interested in attaining your collateral, but rather in funding a successful deal.