A common question asked by California private Trust Deed lenders and conventional mortgage brokers is how much loan to value will our investors loan. This is akin to how much risk is reasonable? And while there are basic guidelines and rules of thumb, each piece of collateral and borrower is different.
We feel strongly that the loan to value can be more aggressive when a borrower is purchasing a property rather than refinancing. The borrower must put his/her monies into the transaction – “skin in the game”. Whereas, when a borrower inherits a property and takes out cash on a refinance, the borrower has no skin in the game, and presents more risk for the Lender.
Additionally, the type of property, location, condition and market climate all impact the risk factor, and, ultimately, the loan to value agreed to by the lender. If the property is rural, resale becomes tougher, creating more risk for the investor. If the property is land or some odd zoning, again, the ltv will be lowered to reflect the risk. If the borrower is chronically bad with credit, the loan to value will be affected as well.
However, to fully break down the hard money lender mentality and realize the break-even point, here is an example:
The determined value of the subject property looking at similar recent sales $140,000 on this example
- Deduct one year’s interest payments
- 10% selling costs
- 5% repair costs
- $5000 for foreclosure legal costs
Based on a 72% ltv ($100,000 loan amount) , this all comes to $32,000 – which leaves 108,000. Of course the investor must consider a margin for error on values and a profit margin for his/her time and efforts.
For a loan of this size, 70% on a purchase or 65% on a refinance is the maximum loan to value, if the property is an SFR in a reasonable area. However, the investor must also consider the balance of the package, which includes location, condition, type of property, quality of borrower, and market condition before approving and funding the loan.