Loan to value ratio, LTV, is calculated by dividing the proposed loan amount by the current fair market value of the property securing the loan.
For example: If a borrower wants to take out a $50,000 hard money loan on a property worth $100,000 the LTV would 50%.
Combined loan to value ratio, CLTV, is calculated when there are two are more loans on a property.
If there is both a first position loan for $50,000 and a second position loan for $12,000 on a property worth $100,000 the CLTV would be 62%.
The first position lien on the property is always the most secure, which is why most hard money lenders prefer to take that position. That’s why you should not split your funding in a way that makes it difficult for you a second position. Some firms offer specialized funding loans that take into account this division, whereby they will fund 50% of the purchase price contingent on the remainder being financed. Arguably, in this scenario, the first lien has the most secure position, because they are not only covered in equity. Further, they are assured that the borrower has secured funding for the full purchase of the property in question.
LTV is the primary factor used by hard money lenders to determine the feasibility and inherent risk of potential loans. Most hard money lenders also have a minimum credit score to go by (at Fulford Lending, we don’t). Your credit score and “its calculation” of your ability to have made monthly payments some time in the past means little to us at Fulford Lending.
Having a low enough LTV position gives enough security that the borrower is almost guaranteed to make payments. If we give you a hard money loan of $62,000 on a property worth $100,000 are you going to walk away when things get tough? No. Your $38,000 worth of equity in the property or “skin in the game” will give you every reason to fight for your property and make your monthly payments to us. That’s what we want, your monthly payments received on time.
Find your LTV today.
-Nathaniel S. Fulford VI