A short-term hard money loan, also know as a bridge loan, is commonly used by Borrowers who need to close quickly on a purchase or refinance, the real estate they are borrowing against is in poor condition and doesn’t qualify for bank financing, or they don’t demonstrate strong credit or cash flow. In many cases, these loans are less than 12 months and are structured as interest only payments with a balloon payment due a maturity.
Hard money lenders that fund bridge loans are primarily focused on the real estate being offered as collateral and less on the Borrower’s credit. The common ratio lenders use when estimating their loan amount is the Loan to Value ratio, or the loan amount compared to the value of the real estate. The LTV ratio is calculated as Loan Amount / Property Value. For example, if a lender is funding a $150,000 loan secured on a property valued at $300,000, the LTV ratio would be 50% or $150,000 / $300,000.
The rule of thumb for most hard money bridge lenders is to limit their LTV ratio to 65% or 70% of the property value securing their loan. Assuming the loan amount does not exceed this ratio, the Lender typically feels confident that the Borrower has sufficient equity in the property to be compelled to make the payment, and should the loan go into default, the sale proceeds from a foreclosure are enough to repay the loan. Keep in mind, LTV ratios on more complex assets such as commercial real estate or more risky assets such as land will have lower LTV ratio requirements.
In cases where the Borrower intends to improve the property, some hard money bridge lenders may consider the After Repair Value (ARV) or After Completion Value (ACV). The ARV ratio is commonly used in Fix & Flip and Fix & Hold loans. In both these scenarios, the bridge lender is using the value of the real estate after the improvements are completed. In these scenario’s, the lender may hold back funds from the loan at close to ensure the improvements are completed and only release them over the course of the construction or once it is completed.
In our first example, our Borrower is under contract to purchase a single-family home they intend to rent for long term cash flow. In order to close on the purchase, however, the Borrower agreed to a 10-day close with no inspection or appraisal. Due to the short timeline and the lack of an appraisal, the Borrower will most likely be unable to obtain conventional financing. In this scenario, the Borrower may use a short-term hard money bridge loan to purchase the property. Once they have made several payments and secured a tenant, they will be in a position to refinance the loan with a conventional bank loan.
In our second example, our Borrower owns a 5-unit apartment building and is seeking a cash out refinance to update the property to attract higher paying tenants. Due to the deferred maintenance and two vacant units, the Borrower cannot obtain conventional bank financing to payback the existing loan and have enough funds to complete the repairs. In this scenario, a hard money bridge lender may provide the borrower a 12-month bridge loan which is based upon the ARV, thus offering enough funds to complete the repairs. Once the repairs are completed and the property is earning more income, the bridge loan would be repaid with conventional bank financing.
Hard money bridge loans play an important role in real estate finance. They offer a source of capital to Borrowers who cannot obtain conventional bank financing. Because private money bridge lenders place more emphasis on the LTV or ARV ratio and not the Borrower’s financial situation, bridge loans can be an excellent option to fund a purchase or refinance or fund property repairs.
TaliMar Financial is a California hard money lender based in San Diego, CA. TaliMar offers private money financing options for Fix and Flip, Construction, and Bridge Loans. As a direct lender, TaliMar offers aggressive financing solutions at competitive rates. Contact TaliMar Financial today with your hard money lending questions at (858) 613-0111.