What’s in it for a lender to offer me an LTV loan?

18 Replies

Hi, newbie here. Still trying to wrap my head around the refinance part of the BRRRR process. What's in it for a lender to offer me an LTV loan? When are lenders more likely to offer LTV loans, market wise, and based on me the individual? And how and where do I go about finding one or negotiating one? Are these usually "pretty please" case by case basis situations or is this a product that many lenders usually offer? Thanks and sorry if this has been asked.

(For specifics: I’m northern Virginia located, hoping to start with investments in southeastern and southwestern Virginia. If you’ve also got market specific insights I’d also love to hear it.)

@Philip Tuazon

Any loan backed by collateral will have a LTV limit. These are typically not negotiable, and definitely non negotiable for someone just starting out.

Do you mean, what is in it for a lender to give you a loan that gives all your money back? They get paid for writing the loan, servicing the loan, selling the loan. The bigger the amount, the more money they get. The originators are also paid based on number of loans written so they become very happy and eager to work with high volume clients.

@Todd Rasmussen sorry I mean a loan that gives me say X% of the appraisal value versus X% of the price I paid for the property. My understanding so far from David Greene's book and the podcasts so far is that for a BRRRR to work you must somehow get the refi at appraisal value, assuming it's more than you paid to buy and rehab the property to quite literally get paid for the property and that this is how you have cash in hand for your next deal.

Just trying to figure out how, why, and when a lender would be willing to do this for somebody. Especially someone starting out. Why should they put extra money in my pocket above and beyond the total I paid for even if it is worth more due to the forced appreciation.

Originally posted by @Philip Tuazon :

@Todd Rasmussen thanks. That makes total sense. If they give me say an extra $30k over cost, then that’s another $30k they are making interest on correct?

Correct, the loan to value restriction protects their interest. If you fail to pay your mortgage and they foreclose, they are going to recover a % of what the house is actually worth. They want to make sure you have your skin in the game so they will only lend a % of the value of the house. Your equity is your skin in the game. Because that equity is forced and not purchased, you don't have any cash in it but you still have enough skin in the game to satisfy the bank they aren't the only one that has something to lose if you stop making your payments.

Hi Phillip, I can try to clarify the LTV thing.. Basically lenders loan money based on the value of a property. LTV = loan to value. So, for example, if you put 20% down on a property, you are at 80% loan to value because you only have a loan for 80% of the value of the property. If it was a property worth 100K, you'd have a loan for 80K and have 20K of equity into the property.

Let's take your BRRR example. Let's say you buy a multiunit property cash at 100K. You do some upgrades and then you think it's worth 150K. A lender can let you borrow up to 70-75% of the appraised value of the property, which is around 105-112.5K. The property value is determined by the appraiser because the lender won't accept a borrower saying "I think my property is worth XYZ." The lender will want an experienced, licensed professional to confirm the value of the property that they are lending money on. If someone approached you and said, "Hey loan me 75% of the value for this property that I say is worth XYZ", wouldn't you want some sort of verification of the value? In the event of a default, the lender wants to make sure they haven't lent out more money than the property is worth.

The loan to value restrictions differ between different loan types (VA, USDA, Conventional, and FHA), occupancy types, and for purchases vs. refinances.

I hope this was helpful!

@Elise Marquette yep I know it must be professionally appraised to ascertain the value, and what I'm trying to understand is how do I get the lender to offer me a loan based on that appraised value of $150k versus giving me a loan based on the $100k I paid (in which case I would not be able to pull out any capital to reinvest, and likely would not be able to pay back a hard money loan if I had used one to fund the original $100k of purchase and rehab).

Is there a proven track record or investing “resume” I need to have under my belt first for a lender to agree to give me the loan for 70-80% of the $150k or is not unheard of for a new investor to also be given a loan like that? Thanks!

Originally posted by @Philip Tuazon :

@Todd Rasmussen sorry I mean a loan that gives me say X% of the appraisal value versus X% of the price I paid for the property. My understanding so far from David Greene's book and the podcasts so far is that for a BRRRR to work you must somehow get the refi at appraisal value, assuming it's more than you paid to buy and rehab the property to quite literally get paid for the property and that this is how you have cash in hand for your next deal.

Just trying to figure out how, why, and when a lender would be willing to do this for somebody. Especially someone starting out. Why should they put extra money in my pocket above and beyond the total I paid for even if it is worth more due to the forced appreciation.

 Revenue in the mortgage business comes from two places.

- The resale of the loan as part of a mortgage backed security.

- The size of the loan (pre-2008 it was based on your interest rate, terms/conditions of the loan, etc, generally the worse the loan was for the consumer, the more revenue it generated... now it's just the size of the loan).

So if we can give you a bigger loan that can also still be sold to Fannie Mae, why wouldn't we? 

"I mean a loan that gives me say X% of the appraisal value versus X% of the price I paid for the property."

That's any bank just about now. However, usually at fixed LTV it'll be based on LOWER of appraisal or purchase price.

If your paying more than appraisal, you'll need more down.

@Philip Tuazon   I can walk you through a quick real life example.  I've learned to work with smaller local banks that don't resell the loans back to the government, but instead keep them in house.  The rates will be higher and terms shorter (5-6% interest and 20 years term), but they have a lot of flexibility to lend on properties that aren't livable and need rehab.

Their incentive is that they're making more on the interest.  They also knew the property, sitting vacant and an eyesore, and they're a community bank that would provide the financing to fix it up.

I purchased a duplex for $50k that needed about $25k in rehab, and they appraised it at $110k (ARV). They offered a purchase + rehab financing loan that converted to a normal mortgage once the rehab was done. So no going to HML, paying points and high interest, doing the work, and then having to refinance out (no two sets of closing costs).

They would lend 70% of the ARV, or $77k for purchase + rehab, which was more than enough the cover it. 20% down on the purchase price, so $10k down and only $1k in closing costs.

Yes, it helps to have a relationship with the bank and/or partner with someone if it's your first deal.  This was a full doc loan, good credit and reserves needed (I needed $30k total for this deal, $10k down, $10 to start rehab (later reimbursed), and $10k in reserves).

Hope that helps!

Your question is why LTV vs Cost, right?

One of my first rentals was a 4 unit that I bought cash for $37k. It was rundown and all units vacant. I fixed it up doing the work all myself, spent around $5,000 in material. So I had invested $37k +$5k = $42k.

Then (2 months after purchase) I called a mortgage broker and asked if I could get a cash-out refinance. He said it would go by purchase price plus improvements (must have receipts), loan would be 75% of that value. To go by appraised value he said all banks require "title seasoning". He said Wells Fargo (at the time) only requires 6-month title seasoning while most other banks require 12 months. He called me again after my 6 months were up. Appraisal came in at $90k and they gave me a cashout loan for $60k. So at that point I basically had a "profit" of around $10k after all closing costs.

Now there are some lenders that can do right after purchase a cash-out refinance based on appraisal, regardless if you only paid one dollar for the property. So if you cannot wait 6-12 months then you have to look for one of these lenders.

I am actually right now in the process of buying two houses on one lot, two fixers, for $190k, and after $10-$15k improvements it should appraise for around $300k. I am hoping to get all my money back out asap with a cash-out refinance, and since the total rent should be around $2,500/month I should still have about $1k a month in positive cash flow with (hopefully) zero invested. Not counting my labor. If I have to wait 6 months until they can go by appraisal instead of cost, that will be fine with me because I will need 2-3 months for the rehab anyways, so only a 3-4 month delay. If I have to wait a whole year then I might go with a different lender and pay a little higher interest rate.

Hope this helps.

@Philip Tuazon the short answer is you don't "get them" to do anything they do what they do based on how they lend. Some lenders lend based on LTC (loan to cost), some lend based on LTV. I don't know any that do one or the other based on the borrower. Some may be LTC for a certain seasoning period then be LTV based while others may be LTC regardless if you purchased 10 years ago.

Hi Philip,

I took your question as more of a fundamental question about lending in general and want to give a more birdseye view answer in addition to the great answers you've gotten so far.

As everybody else said, lenders lend to make money of course, but why do they lend based on the new value rather than on what you paid?

Mortgages are always based on the market value of a property and that value is ascertained by one of, or a combination of, three methodologies. Method one is the comparable method i.e. what are similar properties in the same market selling for today. Method two is the cashflow method i.e. ascribing a value based on the income the property produces. Method three, which is generally way less important, is the price of physically constructing the property. Generally, value is ascertained by a combination of the first two methods.

With a mortgage loan a bank has your property as collateral for their loan. If you can't pay then they take the property and sell it to recoup as much of their loan as possible. Therefore, there's no reason why they should care what you paid for the property - all they care about is what it is worth on the market if they need to foreclose and sell. The reason that lenders generally keep a strict LTV cap is that in the case of a foreclosure they want to be as sure as possible that no matter what the market conditions are they will still recoup 100% of their money. If they lend to you at 70% LTV, they can still get all their money back even in the catastrophic situation of you defaulting immediately and the market taking a massive hit at the same time.

So, if the market truly says your property is now worth 150k, the bank is comfortable with lending to you based on that valuation.

Loan to cost is not generally a ratio used for mortgages - usually LTC is used in construction lending where there is value being added. Just like in mortgage lending, a bank never wants you to "get ahead of them" where you have borrowed more money than the collateral is worth. That's why construction loans don't give you all the money up front and say "ok go do your project," but instead let you draw money from the loan as you complete work. The value of the project always has to be greater than what they have loaned out. This might not be the case for a very small hard money acquisition+rehab loan but it will be for anything substantial that the lender would consider to be even a modest loss.

So, long story short. A lender doesn't care what you paid, they only care about the value of the collateral.

I hope that was helpful!

@Mark Luehring-Jones I will say that's not necessarily true. Having worked for a hard money lender our long-term loans were always based on LTC no matter when they were bought and I know others also operated in the same fashion. Also, plenty of banks will only consider LTC until the seasoning period is over so even if you claim you did X amount of work bringing the value up to something else they still aren't going to give you that on a loan. I also just came from another post where a lender backed out because the property recently was purchased a certain amount and they were trying to purchase at a much higher amount because it's market value is currently higher.