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Applying for an investment property loan requires understanding the terms used in the lending industry. This is especially important if you are considering taking out a hard money loan. Hard money loans are typically used for short-term financing and are secured by real estate.
Let’s take a look at 10 hard money terms to look out for when applying for a loan.
1. Loan-to-Value Ratio
The loan-to-value (LTV) ratio is a common term used in hard money lending. It describes the ratio between the loan amount and the appraised value of the property being financed. Hard money lenders use this ratio to decide how much financing they will give for a property.
For example, suppose your property is appraised at $200,000. The lender has an LTV ratio of 70%. This means they would lend up to 70% of the appraised value, which is $140,000.
The loan-to-value (LTV) ratio is essential for hard money lending. It establishes the amount of equity you will need in the property. In general, hard money lenders will require a minimum equity position of 20-30% in the property.
You must have a down payment or equity of 20-30% of the appraised value of the property. This is necessary for a successful purchase.
Did you know?
It is essential to understand that the loan-to-value (LTV) ratio differs from the loan-to-cost (LTC) ratio. The LTC ratio is calculated on the total cost of the property, accounting for any renovation or construction expenses. The LTV ratio is based solely on the appraised value of the property.
2. Loan-to-Cost Ratio
The loan-to-cost (LTC) ratio is a term used in hard money lending. It is the ratio of the loan amount to the total cost of the property being financed. This includes the purchase price of the property and any rehab costs that will be incurred.
Hard money lenders use the loan-to-cost ratio to determine the amount of financing they are willing…