How do hard money lenders decide how much to lend? Hard money lenders make lending decisions based on either a Loan-to-Cost (LTC) ratio or Loan-to-Value (LTV) ratio. These ratios measure the risk of the loan by comparing the loan amount to the cost and value of the underlying real estate, respectively.
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A hard money lender determines the value of the property through a BPO (broker price opinion) or an independent appraisal done by a licensed appraiser in the state in which the property is located. The interest rates on hard money loans are typically higher than the rates charged for traditional business loans.
Most hard money lenders keep loan-to-value ratios ( LTV ratios) relatively low. Their maximum LTV ratio might be 50% to 70%, so you’ll need assets to qualify for hard money. With ratios this low, lenders know they can sell your property quickly and have a reasonable shot at getting their money back.
Banks that hold mortgages (AKA lend money to people to buy a house) have very distinct ways of assessing whether someone’s credit is good or not as well as if they have sufficient funds to be able to pay the mortgage. It’s not a cookie cutter thi.
As a hard money lender, you make money off other loan costs and fees. Underwriting fees, which are charged to evaluate a borrower’s likelihood of default, can earn you another $750 to $2,000.
Hard money lenders (HMLs) are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score. Usually these loans cost (percentage-wise) much more then an average mortgage , often times up to twice what a regular mortgage does, plus high origination fees.
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