Property Appraisals and the Impact on Hard Money Loans
Jul 14 2022 3 min read (464 words)
VP of Product Management
An appraisal can affect the loan-to-value (LTV) ratio on a hard money loan. The LTV is the percentage of the property's value that the lender will finance. For example, if a borrower wants to borrow $100,000 against a property that has a value of $200,000, the LTV would be 50%. If the appraisal comes in at $180,000, the LTV would be 61% ($100,000/$180,000). The LTV ratio to help determine the risk of the loan, and a higher LTV means a higher risk. As such, a higher LTV will usually result in a higher interest rate.
An optimal interest rate is achieved on a hard money loan LTV below 60-70%. An appraisal that is lower than expected can impact the loan amount that a borrower can qualify for. On the other hand, if the appraisal comes in higher than expected, you may be able to get a larger loan. Appraisals can also affect the interest rate on a hard money loan. In some cases, a low appraisal can even make it difficult to get a hard money loan at all. If the LTV is too high, most lenders will not be willing to finance the loan. So if you're thinking about getting a hard money loan, it's important to have a realistic idea of your property's value.
Differences between mortgage and Hard Money Appraisals
Traditional mortgage appraisals are conducted by certified appraisers who are employed by the lender. These appraisers are typically looking at the property to make sure that it meets the requirements for a traditional mortgage. They will also look at recent sales of similar properties in order to come up with an estimate of the property's value.
Hard money lenders also use appraisals to determine the value of a property, but they typically employ their own in-house appraisers. These appraisers are often more flexible than traditional appraisers and may be willing to look at a wider range of factors when determining the value of a property. This can work in your favor if you have a property that is unique or has special features that may not be taken into account by a traditional appraiser.
One thing to keep in mind is that hard money lenders typically base their loans on the 'after repair value' (ARV) of a property. The ARV is the estimated value of the property after any necessary repairs and renovations have been made. This means that even if the appraised value of your property is lower than you hoped, you may still be able to get a loan if the lender believes that the property will be worth more after it is repaired.
It's also important to remember that appraisals are not always accurate. In cases of discrepancies, it can be helpful to have a sense of comparable properties, or comps, in the area
Using your Own Appraiser on a Hard Money Loan
While you may be able to your own appraiser on a hard money loan if they are on a lender's approved list. Hard money lenders' underwriting requirements can vary from lender to lender. To ensure a smooth funding experience, it's generally best to utilize your lenders' recommended appraisal list. If you have any questions or would like to find out if your preferred appraiser is on Lend Some Money's list, speak to one of our highly experienced loan officers today!