How to Calculate the Right LTV ratio for Hard Money Loan?


The benefits of commercial real estate investment attract investors a lot. But in some cases, the investors might need more funding to use the available opportunity.

Besides, given the complications of traditional loans, things can get tricky. Herein getting funding from private lenders will be highly advantageous. There are a lot of private lenders who are interested in providing you the financing for the investment property.

But you need to understand that they will come with long-term average rates. Further, the private lenders will only provide interest-only payment schedules, which typically will be between 6 months to 3 years.

Another aspect that offsets some hard money loan costs is lenders’ calculation of the loan-to-value ratio. It can result in the borrower getting more funds than he receives from the traditional lender.

Therefore, the analysis of the loan-to-value balance is highly crucial for financing. If you are unaware of it, the guide will provide insights into how lenders calculate it.

What is the loan-to-value ratio?

LTV is the hard money loan size relative to the quick sale property value provided as collateral. All of the hard money loans come with the requirement for collateral.

They are classified as secured loans. In a hard money loan, the borrower provides the lender with a property as collateral. So in case the borrower fails to make the payment, the lender can use the collateral property to recover the losses.

An example is that a lender takes 65% LTV on the property value of about $500000, and the loan amount here will come around to be $325000.

When you look at the LTV rate, the bank will likely provide you with about 80% LTV loan, which will be a better deal than considering the private lenders who will only offer your 60% to 65% LTV.

However, you need to understand their model aspects. The borrower needs to consider other than the LTV ratio before deciding on the financing.

When you choose to get financing from private lenders, there are certain things you need to keep your mind. For instance, when you obtain the hard money loan, the amount will not be the total value of the property you provided as collateral.

Instead, it will be a lot smaller than the final amount. This represents the loan to value. It is expressed in the percentage. So the loan to valuation will be the amount of the hard money loan you will receive relative to the sale value of the property you have provided to acquire the financing.

Why is the LTV ratio important?

Private lenders consider the LTV ratio essential before providing the borrower with financing. Therefore, you must evaluate and analyze the LTV ratio before getting funding from a specific lender. It is crucial because it represents the amount of hard money loan you will receive relative to the value of your collateral.

When you get a low LTV ratio, you will acquire less money than the lender wants. However, when the ratio is high, the amount you will receive will be way more than the collateral value.

You must understand that the collateral value always remains unchanged all over LTV. This will mean the lender is offering you less money tomorrow based on the collateral value.

How to determine LTV for a conventional loan?

The Federal Regulations ask the institutional lenders and the banks to calculate the loan amount using the lesser of the purchase price or based on the property’s current appraised value.

This means when you have an excellent deal on the property valued at $500000, but the purchase price is only $400000, then the bank loan will come with 80% LTV. This is because it will be based on the purchase price, while the loan amount you will receive will be $320,000.

Comparing this LTV rate with the 65% of private lenders, you will see if the personal loan will be beneficial. After all, you will receive only two 240,000, which is a bad deal. But you can still give away the financing option. After all, you have to consider many different aspects before making the final decision.

LTV for hard money loans is different

Although comparing banking institutions might make it easy to decide, you must understand that hard money loans are a good deal. It is important to remember that the same federal regulations do not bind private lenders, so they are free to choose the value they wish to determine for the financing they provide you.

Most reputable private lenders can make use of higher property values rather than lower ones. Also, when dealing with distressed properties that require renovation, the lenders are generally willing to use the after-repair or renovation value of the property.

Now, when you consider the above-given example, the private lender here will use the appraised value rather than the purchase price of the property. So the 65% LTV loan would be 350000, which will be a lot higher than the traditional bank can provide you.

Thus, you can get a more significant loan from a hard money lender despite a lower LTV rate. But remember, the actual loan amount for which you will qualify will depend on many factors, including the down payment, project plans, the borrower’s experience with real estate investing, etc. Therefore, it would be best to stay aware of all the essentials before you decide to get financing from a private lender.

What is a typical LTV ratio?

If you know hard money loans, you might wonder about the typical or general LTV ratio. Remember, the ratio can vary greatly. Some lenders can offer you higher LTV, while others will settle at a lower rate.

The industry average ranges between 35% to 50%. An LTV ratio of about 35% means that the amount of the hard money loan you will be receiving will be 35% of the value of your collateral. So if the collateral value is $100000, then the amount of loan you will receive will be $35000.

You need to discuss the LTV ratio with the lender to understand if it will be worth it for your condition. Research or analysis here will be beneficial for you to find someone who can provide you with a good rate for your requirement.

How to choose a suitable lender?

Suppose you are hoping to get financing from a private lender. In that case, you must research well about the available options and understand who has earned a good reputation in the industry.

You need to have proper knowledge about the experience and importance of the lender before making the decision. After all, it can significantly impact your experience and the interest payment you will have to make.

So a comparison of all the top options is essential in the main terms like knowledge about the industry, reviews, experience, interest rate, LTV ratio, and various other factors.

You must consider at least 2 to 3 lenders with a good name in the industry. This will give you an upper hand and help you decide on the one that will benefit you. The research process takes a lot of time, but it will be worth it when you can get a good LTV for your loan.

Also, feel free to understand the LTV ratio, as it is the key to getting the maximum amount of financing for your loan. Knowledge about the same in advance will be crucial to understanding and comparing the choices to get yourself a good deal.

The research process will take some time, but you can consider connecting with an expert who knows about things better. It will make the decision process comfortable and fast.


When you want to finance from private hard money lenders, consider connecting with Private Capital Investors for the proper support. We have a team of experienced professionals. We will take into account your specific requirements and come up with a strategy that will be beneficial for you to get the required financing quickly.

We will help you find the best deals possible to make the most of the available opportunity and put your money in the right place. We will help you know the available options and compare the deals to get the best for your scenario. With their support, you can avoid any complications with your loan amount. In addition, they will help you get a lower interest rate and a good LTV.

Want to learn more? Get in touch with us today.

Similar Blog

What is Smart Building & Its Future in Commercial Real Estate

What is Smart Building & Its Future in Commercial Real Estate

If you’ve ever worked in an office, you’ve probably complained about the temperature at some point. Controlling the thermostat in large commercial buildings is tricky and is often a constant struggle. That’s because different building sections are affected by sunlight...

Want to learn more? Get in touch with us today.

Our experienced team is ready to assist with your financing needs.

2101 Cedar Springs Road Suite 1050 Dallas, TX 75201