In a conventional mortgage loan, it is normal for a lender to finance a majority of the value of the house, but not the entire value. The lender will provide a certain percentage of the purchase price, and the borrower/buyer must pay the difference. This difference is the down payment. Lenders require down payments in order to create incentive for the borrower to make the required payments on the loan for fear of losing the down payment.
For a long time, mortgage lenders required down payments of as much as 20% of the value of the house. In recent years, the trend has been for it to be much lower – with 60% of first-time homebuyers making down payments of 6% or less – but what remains true is that mortgage lenders almost always do require some down payment. That being the case, it is natural to wonder if hard money lenders do the same.
Lending Based on ARV
As a general rule, hard money lenders realize that their borrowers are real estate investors who turn a profit by buying troubled properties, repairing them, and then selling them at a price higher than the combined costs of purchase and repair. That being the case, hard money lenders tend to issue their loans not based on the initial purchase price of the house, but based on the after-repair value (ARV).
Note that the ARV is not calculated based on the cost of the repairs: instead, it is calculated based on the value added by the repairs. For example, the borrower may use a hard money loan of $140,000 to purchase a home for $100,000 and then spend $40,000 to make repairs. After the borrower has made these repairs, he or she may actually be able to sell the house for $180,000. This is the number that the hard money lender looks at when making the loan.
As a result of the ARV calculation, from the perspective of the borrower, the lender is making a loan of 100% of the cost of the property, with no down payments required. However, from the perspective of the lender, things are different. The lender sees this as a loan for about 70% of what the property will be worth after the repairs. In this way, the arrangement is beneficial for both parties. The borrower gets 100% of the cash needed for the project, and the lender has a cushion of value as a protection from loss (since the property itself is collateral for the loan).
Hard Money Loans in Los Angeles
With total transactions of over $22.9 billion in 2017, Los Angeles is the second most active real estate market in the world. That being the case, hard money lenders in Los Angeles such the highly reputable PB Financial Groupare very active in the area, offering competitive rates on their loans. To learn more please schedule a consultation with one of our expert hard money lenders at 877.700.3703 or visit www.CalHardMoney.com for further information.