Often, the loan amount the hard money lender is willing to lend a borrower is determined by the ratio of loan amount divided by the value of property. This is known as the loan to value, or commonly by the acronym – LTV.
Depending up on location and quality of borrower and property, many hard money lenders will lend up to 65 – 75% of the current value of the property. Some lenders will lend based on the after repair value (ARV) which is the estimated value of the property after the borrower has improved the property. This creates a riskier loan from the hard money lender’s perspective, because the amount of capital put in by the lender increases and the amount of capital invested by the borrower decreases. This increased risk will cause the hard money lender to charge a higher interest rate and fees.
Often times, the location of the property or the property type will also affect the loan to value. If the property is in a rural community, or a rougher area, the lender will minimize his/her risk by lowering the loan to value and/or asking for more interest or points. If the property is land or a condo, many times the lender will again cut the loan to value to reflect the risk involved.