Confused about LTV for Hard Money

[Amy Van Ollefen]

I've read a lot of posts about this, and am still a bit confused. If I am purchasing property that the asking price is $99500 and the appraisal is at least $155K which makes under 65% LTV, if I am getting a hard money loan, do I still need a down payment? If they loan up to 65% wouldn't that mean I could get the loan for $99500 and not have to put a down payment down, and I could just pay closing? The equity is the down payment? Or am I not understanding how this works? Do I need a down payment regardless, but I just can't get a loan for more than $99.5K, and the downpayment would be 5,10 or whatever percent of the 99.5K of the loan?

[Mike H.]

I think you're getting some bad advice on here on hard money. Not because its bad advice but because there are simply different types of hard money lenders and the ones commenting above are not the right ones that fit what I believe you're looking for.

There are some hard money lenders that will lend you a percentage of the purchase plus rehab. And there are some that will lend you as a percentage of the ARV.

The former types and some of the people on here that are suggesting they will lend 65% of the 99k make no sense to me either. So you and I are in the same boat. It makes no sense for me to pay the points and the super high interest rate if I'm putting 30% into the deal. Why do i need hard money if I'm putting that much down? Use a regular bank.

Now what I'd recommend you do is find some of the hard money lenders that have the right program for what you seem to be looking for. Find one that will lend up to 65% of the ARV of the home.

So, in your example. if your puchase prices is 100k and it needs 10k in rehab, then your all in price is 110k. The hard money lenders that I use will then have an appraisal done based on what the house will be worth AFTER (hence the term ARV or After Repair Value) the rehab is completed.

They will lend you up to 65 or 70% of that ARV number. So lets say it appraises out at 150k based on the house being fixed up. And the rehab/hard money lender lends up to 70%, they would do a loan for you of 105k total.

They'd pay 95k at the closing and 10k would go into a rehab escrow that they would hold until the work is complete.

That means you'd have to come up with the other 5k to purchase the home PLUS the closing costs and points that hard money lenders charge (typically 4 to 6% of the total loan amount). In this example, you'd probably be out of pocket about 5k for purchase, 5,500 for points, and another 2k or so for closing costs. Or roughly14k total.

But there are two reasons why hard money is such a valuable tool.
1) If you can find better deals, you can limit your out of pocket to just the points and closing costs. With some hard money lenders (there's one I've done a lot of deals with) that will even roll the points and the closing costs into the loan so you truly have a no money down deal. But the deal has to be tremendous to do that.

2) Even at 14k, you're still doing far better than if you were to use a traditional loan.

For those, you'd need to come out of pocket 25% plus pay the rehab and closing costs out of pocket. In your example. 100k purchase (25k down) plus 10k in rehab plus 2k in closing costs.  Thats 37k that you would need to do the deal.

And try getting that money back out. In a flip, sure. In buy and hold, thats a cash out refi that is much harder to get. Using the hard money loan, you would have a loan of 105k and could rate/term refi that out so you only end up out the 14k total.....