Tactics to secure a larger hard money loan: estimate the ARV
A hard money loan (i.e.,an asset-based loan) is any loan secured by the value of an underlying asset. Most of these lenders will only give loan of up to 65 percent of an assets market value.
But what if you intend to renovate a distressed property which is significantly undervalued at the time purchase? To secure more in the way of financing you need to understand what your property worth is after you’ve repaired it (the after repair value, or ARV).
Asset-based lenders could offer more financing if you can demonstrate the potential of a project. However, to explain a project’s potential you need to understand property valuations. Relying solely on appraisals will limit your understanding and wont serve you in the long run as a real-estate investor. Professional assessments are also expensive and time-consuming.
Your best bet is to develop your sense of what a property is worth by comparing your estimates with that of a licensed appraiser. Educating yourself this way will develop your understanding of property valuations. An excellent way to start training yourself when it comes to property values is to use the comparable sales method.
You can begin to estimate the ARV yourself by utilizing the
comparable sales method, which could help you qualify for a larger hard money loan.
The first step is to assess your subject property, look at its location, what is the neighborhood like and what impact does this have on the properties value? Figure out the lot size and determine the condition of the exterior. Find out essential details about the property, its size in square feet and its amenities (i.e., Number of bedrooms and bathrooms).
Find 5 to 10 properties similar to your subject through local listings. Only consider properties that have sold within the last 3-6 months, are in the same location and have a similar size and similar amenities. It is crucial that you don’t look at distressed properties. Remember you are trying to determine your properties potential after you have made renovations.
After you have enough comparable properties, consider the ones that are the most similar and find the properties with the highest and lowest selling price to estimate a range of value for your subject property. These numbers will give you a sense of what the property will sell for after you make your repairs. With this understanding, you can thoughtfully discuss the potential of your renovation project with a lender and qualify for the best loan.
You can secure a larger hard money loan if you can
explain the potential of your project
Even the most informed estimate of a properties value is only an educated guess. If you rely solely on appraisals, you aren’t building your knowledge of property valuations. Using a simple comparable sales method is an easy way to increase your understanding of property valuations and the after repair value of your property. Having this understanding builds your lenders confidence in your project and increases your eligibility for a larger loan.
Tactics to secure a larger hard money loan: help your lender look past the LTV
You may already know that a hard money loan is a loan which is backed by a “hard” asset. The amount of financing you receive is usually a set percentage of the value of that asset, or LTV. Learn some strategies to help your lender look past the LTV in order to qualify for the most financing possible.
Giving loan at the lowest possible LTV is the primary way asset-based lenders protect themselves. A higher LTV means a borrower has less at stake in the event of default, and asset-based loan rarely exceed 75 percent in LTV. What if you need a larger loan which exceeds the standard 75 LTV benchmark? While LTV may be the most critical factor a lender will consider, there are other factors also taken into consideration, which can give you leverage to negotiate a larger loan.
Say you need a 760,000 dollar loan to finance the purchase of a million dollar property , in this case the LTV would be 76 percent. While the LTV on this loan is high, in this instance you would have 240,000 in equity invested which may be an amount significant enough to help your lender look past the LTV. You should also consider any other property you own, which could be used to back the loan ( a practice known as cross-collateralization).
If your home is worth 250,000 and you use it as collateral to secure the loan, in effect you have 490,000 of your own money backing the loan. These are just two specific instances were any reasonable lender could look past the LTV, but you should also take steps to demonstrate your strength as a borrower.
If you can, build your hard money lenders
confidence in your strength as a borrower
Any reasonable lender will also consider your strength as a borrower and not just the LTV. Even though private lenders have a less traditional approach, the three C’s of credit, capacity, and collateral still apply. Credit refers to your history of paying your debts on time. A reasonable lender might look past the LTV if you have a solid credit history. Capacity simply refers to your ability to service your debt on a monthly basis, so if you have a good steady income, you may qualify for a larger loan. LTV may be the most important factor when it comes to asset-based loan, but it is just only one factor a lender might consider. Evaluate your financial situation and demonstrate your strength as a borrower.
If you can thoughtfully consider your situation, you can increase your eligibility for a larger hard money loan
First consider the dollar value in terms of equity you have invested, knowing this number you can demonstrate to a lender exactly how much you have at stake. Take into account any other collateral you might have to back the loan and build your lenders faith in your strength as a borrower. Using any one of these strategies might help your lender look past the LTV which could help you qualify for a larger loan.
Why You Should Work with a Broker to Get Approved for Hard Money Loan
When it comes to obtaining a loan, more than half of applicants get rejected. This is a daunting statistic, but Level 4 Funding shows you why it’s easier to get approved for hard money loan when you have the help of a broker.
There are many reasons people get denied a loan. Perhaps the economy is in trouble and banks have tightened their wallets. Maybe you have a few dings on your credit history, are a first-time borrower or need the loan for a venture that is considered high-risk. All those are red flags for conventional banks and financial institutions because typically they are very conservative when it comes to lending.
That’s why seeking the help of a broker for hard money loan can be the ticket to your success, and your loan approval! A professional broker can help you get your loan, and get you the cash you need to start or grow your business very quickly. These alternative routes care less about some of the things that are considered “red flags” to traditional lending institutions and more about the collateral you are willing to put up to secure the loan. Brokers for these hard money loan need to ensure they will see their return on investment because they are talking a risk on you and your business.
Typically, the collateral and the interest rate depend on the size of the loan itself and the repayment term schedule. You will want to make sure you can work with your broker to get repayment terms that are realistic because if you can make those payments consistently, that collateral that you put up will now belong to the lender.
There are pros and cons to these types of hard money loan.
The benefits of these loan are great – quick and simple application and approval processes with cash in hand fast! Sometimes you may not even have to go through a credit check. However, there are always the cons — in this case, high interest rates and pre-payment penalties are associated with these types of loan.
Talking to a broker can help you figure out your exact needs — and the loan to best fit those needs.
The Level 4 Funding team is on your side. As brokers should be, our professional experts are here to help make the process easier for borrowers. It’s important to be open and honest about your needs so our team can serve you best. We want to ensure that all our clients have more successful chances of getting approved for the loan they need. We want to take the stress out of getting a loan, so you can focus on more important things — like building and growing your business. So what are you waiting for? If you have been thinking about applying for a loan and you haven’t made the leap, call Level 4 Funding now and see how we can help you turn your dreams into reality!