How Does A Hard Money Loan Work?

What do hard money lenders look at? There are two main factors you need to know.

Becoming hard money proficient will put you miles ahead as an investor.

Before you run to any lender with a deal, you’ll need to know… How does a hard money loan work? There are two key terms you’ll need to understand: loan-to-value ratio and, more importantly for fix-and-flips, after repair value.

Loan-to-Value Ratio

The first important number a lender takes into account is the cost of the property. The second is the amount of the loan. Loan-to-value ratio is the ratio of the loan and the cost.

Let’s say you have a property with a current appraisal of $200,000. Then you get a loan for $100,000. The loan is half of the value of the home, so your loan-to-value is 50%.

After Repair Value (ARV)

ARV, after repair value, is another important factor hard money lenders consider. The properties targeted by real estate investors are undervalued. They need repair-work done to be brought up to the standards of the surrounding community.

So, lenders look at not only the current value of the house, but also the future value of the house, after it’s all fixed up.

Many hard money loans are based on after repair value rather than loan-to-value. Your lender might offer you up to 75% – not of what you’re buying it for, but what you could sell it for by the end.

What Does A Hard Money Loan Using ARV Cover?

A key factor to ARV is that lenders will lend not only for the initial purchase, but for the fix-up costs too.

Many lenders will put money aside in escrows to use throughout the project to pay contractors and cover other renovation costs.

If your loan considers ARV, it’s possible for you, with ZERO money down, to:

Buy a property.
Fix it up.
Either sell it (fix-and-flip) or refinance it (BRRRR).

After selling or refinancing, you use that money to pay the loan back.

Hard money is designed to build value into real estate. Understanding the role of the after repair value will help you immensely in your hard money investments.

Read the full article on hard money for beginners here.

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