Whenever you're getting any sort of loan, it's important to look like a good investment. Bank mortgages require a lot of paperwork and work through a long checklist of factors that help them evaluate whether they should give you a loan. Even getting a car loan involves a credit check and some substantiation that you can pay the loan back. But a private mortgage loan has fewer constraints. The W2 requirement that limits self-employed real investors doesn't always apply, and a cyclical income history will be evaluated instead of just dismissed. But private loan companies still look at financial factors to evaluate the riskiness of loan. One of the main considerations is the LTV, or loan to value, ratio.
What is a loan to value ratio?
Mortgage loans involve a lot of numbers. The loan rate percentage is one of the numbers you might use to evaluate whether a certain loan fits into your business plan. You might also look at the length of the loan and the APR. Loan providers look at two numbers in particular: the amount of money you wish to borrow, and the value of what the loan will help you do or purchase.
For a mortgage loan, the LTV ratio is the amount of the loan compared to the selling price of the house. If you have to put 3% down on a $200,000 house, then you have a $6,000 down payment and the remainder of the purchase price, at $194,000, will need a loan. You will have an LTV ratio of 194,000 to 200,000, or 97%.
If you're using one private lender when you first buy the house, then finding the LTV is simple. It's simply 100% minus the down payment percentage. But if you need a loan halfway through your ownership of the house, you're refinancing a rental property, or you need a loan to finance the improvements, the math can get a little bit trickier. However, regardless of the loan's purpose, a low LTV is the best way to get a loan at a great rate.
What are the benefits of a low LTV ratio?
Because both the ATV and the amount of the mortgage loan are high, you will probably need a great deal of substantiation to prove to the loaner that you are worth the risk. This can include anything from an established history of profitable real estate investment to a high value of personal assets. You have to find a way to prove to the loan company that you will pay the loan back. That's why private loans are so advantageous: they are more flexible and don't have a required checklist that rules you in or out of a loan.
Having a low LTV removes the need for a lot of that substantiation. A low LTV in a general housing market generally means a smaller loan. The loan company is putting less of their money at risk. More importantly, the loan is low compared to the overall value of the property. That means you had the capital on hand to pay a large down payment or otherwise cover a large portion of the property. That means you are responsible with money, have plenty of capital, or both.
You can have a low LTV ratio with everything from undeveloped land to multi-family housing to high-end houses. The overall amount of the loan is a significant factor in deciding your rate and making a final decision. Don't underestimate the importance of a low LTV and a plan. Go to Center Street Lending for more tips to get started with your next flip.