Money is essential for every successful business. However, having so much capital on hand isn’t practically possible. As a result, firms resort to money lending.
Hard money lending has gained popularity among many Americans as they switch from the lengthy approvals and high standards of traditional financing solutions. However, when hard money lenders make their final decision, LTV is a critical factor to consider.
Hence, it’s crucial to know about LTV ratios to get your hard money loans approved. Let’s look at what an LTV ratio is and what it can accomplish for you in more detail.
Fundamentals of LTV Ratio
The loan-to-value ratio is critical in deciding the loan amount in most hard money loan applications. It’s a ratio that compares the amount of debt you owe to the value of your assets.
It’s one of the best ways for private money lenders to assess risk before giving a loan. LTV ratios of 50% to 80% are feasible and ideal for completing a loan contract. Any percentage larger than 80% is risky for the private lender, and anything less than 50% is impossible to achieve.
The Importance of LTV Ratios
Because it specifies the level of lending risk, the LTV ratio is one of the most significant determinants of the loan application outcome. Calculating the LTV ratio is part of any private money lender’s underwriting procedure.
Because hard money lenders don’t do credit checks or other comprehensive checks like banks, they rely on the LTV ratio to make decisions. The LTV ratio also helps private money lenders determine how much money they can collect if a borrower defaults on the loan.
How to Calculate the LTV Ratio
Dividing the total amount borrowed by the total cost price and multiplying it by 100 will get you a loan-to-value ratio in percentage form.
LTV = (Loan Amount / Total Cost Price) × 100
Assume you’re purchasing a $400,000 home with a 20% down payment. This implies you’ll put down $80,000 and take out a $320,000 loan to cover the rest of the cost. This indicates that the LTV ratio is 80% ($320,000/$400,000 * 100 = 80%) and suggests that lending money in this situation is feasible for the lender.
Understanding the LTV ratio can help you get the best hard money loan deal possible. If you’re looking for a reliable private money lender to obtain hard money loans, stop by Commercial Private Equity today.
For over 75 years, we’ve been serving our clients and have developed a three-tiered financing strategy with varying loan-to-value ratios. We provide several specialized loans to our clients, including construction, bridge, commercial, raw land, and workout loans, to give flexibility in their loan transactions.
Contact us today to get started.