Are you a newbie when it comes to the world of Hard Money? Let’s say you decided to try out flipping homes, you did some research and came to find out that one of the best ways to fund your project is through a hard money lender. As you’re browsing around for local lenders, you suddenly come across what seems to be some sort of secret language, “LTV, ARV, CLTPP??” What does it all mean?
Don’t get scared away too quickly. While it may seem overwhelming at first, these terms will become second nature after your first few projects. However, it’s important to have a general understanding of some hard money terms before your first loan. Knowing these terms will help you ask the right questions, get the best deal, and ultimately find the right hard money lender for you.
Hard Money Terms
Without further ado, here are 5 Hard Money Terms You Should Know Before Your First Loan:
- LTV (Loan-to-Value): Think of LTV as the equity within a deal. Lenders want to have enough LTV or equity in the deal that if you default on the loan, they will be able to take the property back, sell it, and still be safe. Take for example you need funding on a property that is worth $100K. If the lender lends $70K, the loan would be at 70% LTV. By having 70% LTV, the lender is limiting their risk with 30% equity as a cushion because the borrower has “skin in the game” and is less likely to default on the loan.
- LTC (Loan-to-Cost): This is a metric used to compare the loan amount of a real estate project to its cost. To calculate, take the loan amount and divide it by the total project cost, which includes acquisition, construction, and renovation costs.
- Rate: The rate is the interest rate of the loan. It is a percentage of loan to be paid by the borrower to the lender in fixed intervals. Say the rate is 12% on a $100K loan with an 12 month term. If the rate is due on a monthly basis, you will have to pay the lender $1K every month until completion of the term.
- Processing Fees: Money that the hard money lender charges the borrower in order to create the loan. These fees can include processing the application, underwriting and funding the loan, and other administrative services.
- Points (Origination Fees/Lender Fees): Points are origination fees that help pay for administrative costs of the loan. One point equals one percent of the total loan amount. Points are set in place to lower the lender’s risk. Points are paid upfront at closing (on top of your monthly interest rates.)
Endnote
Now that you have a couple of key hard money terms under your belt, you are equipped with the basic knowledge needed to understand different factors that go into the loan process. When approaching a hard money lender for your next project, ask about their rates, points, and other origination fees that they charge. What LTV and LTC do they usually provide? Compare this information with other lenders. By understanding these terms, you will be able to ask the right questions and understand what lender can provide you with the best deal for your project while still enabling you to maintain a lucrative investment.
Looking for a hard money lender in Washington State? Check out Pacific Equity and Loan for flexible terms, fast closings, and rates as low as 4.25%
Citations
“Learning The Basics of Borrowing Hard Money” YouTube, uploaded by Flipping Mastery TV, 11 December, 2018, https://www.youtube.com/watch?v=_a8DRGSTGlI
“How Hard Money Loans Work! Easy Guide To Hard Money Loans For New Investors!” YouTube, uploaded by Sean Pan Real Estate Investing, 12 September, 2019, https://www.youtube.com/watch?v=_-ns8rXVwl8
“Hard Money Terminology Glossary.” We Lend Money™, 7 Apr. 2016, welend.money/hard-money-glossary-of-terms/.