Are you considering a hard money loan and wondering how much you can borrow? Loan-to-Value (LTV) might hold the key to your answers. Understanding LTV is important, as it directly impacts both the loan amount you can secure and the terms you’ll receive.
What Is Loan-to-Value (LTV)
LTV is a financial ratio used by lenders to assess risk. It compares the loan amount to the appraised value of the property. For instance, if you’re looking to borrow $150,000 for a property valued at $200,000, the LTV ratio is 75%. In hard money lending, this ratio helps determine how much you can borrow relative to the property’s value.
Hard money lenders typically offer loans with higher LTVs than traditional lenders. While banks might cap loans at 80% LTV, hard money lenders often go up to 90%. This flexibility is one reason investors turn to hard money loans for quick access to capital.
Why LTV Matters in Hard Money Lending
LTV plays a key role in hard money lending for two main reasons: risk management and loan terms. A lower LTV indicates a lower risk for the lender, as the loan amount is smaller compared to the property’s value. This reduced risk can translate to more favourable terms for the borrower, such as lower interest rates or fewer fees.
For borrowers, understanding LTV can help you make informed decisions. A high LTV may allow you to borrow more, but it also means you’re taking on a larger loan relative to the property’s value. This often results in higher interest rates and stricter loan terms, which could impact your profitability.
How LTV Is Calculated
LTV is calculated by simply dividing the loan amount by the appraised value of the property and multiplying it by 100 to get a percentage. Here’s the formula:
LTV = (Loan Amount / Property Value) x 100
For example, if a property is worth $250,000 and you need a loan of $175,000, the LTV would be:
LTV = ($175,000 / $250,000) x 100 = 70%
In hard money lending, lenders often base the appraised value on the property’s “as-is” condition or its “after-repair value” (ARV). Some hard money lenders calculate LTV based on the ARV, which can be beneficial if you plan to improve the property before selling or refinancing.
Ideal LTV Ratios in Hard Money Lending
While traditional loans might cap around 80% LTV, hard money lenders usually accept higher ratios. However, most lenders set their maximum LTV between 60% and 90%, depending on factors like property type, condition, and borrower’s experience.
For example, a property in good condition with a reputable borrower may secure an LTV of up to 85%. In contrast, a riskier property or borrower might only qualify for 60–70% LTV. Knowing your target LTV helps you find the best terms and avoid over-leveraging your investment.
The Benefits of a Lower LTV Ratio
A lower LTV ratio offers clear benefits, such as lower interest rates, fewer fees, and faster loan approval. With less borrowing, you’ll have lower monthly payments, improving cash flow and reducing financial strain.
Also, a lower LTV makes refinancing or selling the property easier. When the property value exceeds the loan balance, you gain equity, providing more flexibility with future financing options.
Looking to secure your next investment with confidence? At Hard Money Georgia, we’re direct lenders in Atlanta and Savannah with 45 years of experience. From fix-and-flip projects to rural land loans, we offer flexible terms and personalized service. Contact us today!