Hard money loans are an increasingly popular solution for real estate investors and developers as they offer a more straightforward path to securing the financing you need. But how exactly does hard money loan calculation work? Read on to find out!
What Are Hard Money Loans?
Hard money loans are short-term loans that are backed by real estate. They are designed to provide a borrower with quick access to capital for financing a variety of needs, including repairs, renovations, investments, or bridge financing. These loans are typically provided by private investors or lenders and have a much shorter repayment period than traditional mortgages.
What Factors Are Involved in Calculating a Hard Money Loan
Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is the ratio of the loan amount to the value of the property being used as collateral for the loan. The higher the LTV ratio, the greater the risk for the lender and the higher the interest rate.
The interest rate for a hard money loan will vary depending on the LTV ratio and the lender. Generally, the higher the LTV ratio, the higher the interest rate will be. Hard money lenders may also charge a premium on top of the interest rate, which can range from 1–5%.
Hard money lenders may also charge additional fees on top of the interest rate. These fees can include origination fees, application fees, documentation fees, closing costs, and other miscellaneous fees.
These lenders typically have shorter repayment terms than traditional lenders. The repayment terms for a hard money loan can range from six months to five years, depending on the lender. In some cases, the repayment terms may be structured over multiple loans.
How Hard Money Loans Are Calculated
Hard money loans are typically calculated using an after-repair value (ARV) technique. This involves assessing the potential market value of a property after it has undergone repairs and renovations. The lender then determines the loan amount based on a percentage of the ARV. This percentage usually ranges from 50-75%, depending on the lender and the borrower’s creditworthiness. The loan amount is then divided by the loan-to-value ratio to calculate the down payment that must be paid by the borrower. The remaining balance is the loan amount.
How Do Hard Money Loans Work?
Hard money loans are secured by using the property being purchased as collateral rather than the borrower’s credit score. The loan is typically structured so that the borrower makes interest-only payments for a certain period of time, followed by a balloon payment for the remaining balance. This allows the borrower to make smaller payments initially and then make a larger payment at the end of the loan.
The borrower is typically required to put a significant amount of money down, usually at least 20%. This is to ensure that the lender is properly secured and has some recourse if the borrower defaults on the loan.
Knowing how to calculate hard money loans is essential to making a sound investment. If you’re interested in learning more about hard money loan calculation and finding a reliable lender, contact GW Private Capital, Inc. We work closely with our clients and help them acquire financing through various loan programs. Get in touch with us today for a quick consult.