What is ARV in Investment Lending?

Key on wood background, FHA loan

FHA Loan, Key on wood background, ARV, Investment LendingThe ARV, or After Repair Value, is a figure used in the BRRR Method (Buy, Rehab, Rent, Refi) to determine the difference between the as-is price of the home and the value of the property after repairs. It is a critical number for real estate investors as loans are granted based on the loan-to-value derived from the ARV.

The after-repair value formula is:

ARV = Property’s Current Value + Value of Renovations

To calculate the property’s current value, it is important to enlist the help of a professional appraiser as they have the expertise needed to identify any issues and “quirks” that could affect the property’s value.

Once you have the property’s value pinned down, you will need to estimate the costs of renovations. Keep in mind that the costs incurred to flip the house must be less than the value of the renovation so your investment will see positive returns. Here are some factors to consider:

  1. Size of space

Remodeling a guest bathroom will almost certainly be less costly than larger areas such as the master bedroom or the kitchen. Full kitchen remodeling projects are likely to run at least $50,000. To cut back on expenses, you may want to consider a partial renovation and avoid major structural changes such as knocking down walls and rearranging the layout.

  1. Property condition

Older houses will often require more maintenance and have underlying issues. An inspection report is key in ensuring that your fixer-upper does not turn out to be a money pit.

  1. Design and Materials

When it comes to pricing, cabinetry, flooring, and windows run the gamut. Choose finished materials that fit into your budget.

  1. Contractor

Get estimates from at least three contractors to zero in on an offer that combines both quality and fair price. Asking for specifics about the scope of work, such as itemized list of repairs, is a good idea.

When determining the maximum price you should consider paying for a property, many real estate investors abide by the 70% rule. Imagine the ARV for your property is $100,000, and it needs $25,000 in repairs, then the most you should pay for it is $45,000. Lenders often times rely on the ARV to determine how much money you can borrow.

Conventional Loans

Conventional Home LoanConventional loans are mortgages made by private lenders, such as mortgage companies, banks, and credit unions. You have no doubt heard about conventional loans as they are the leading option on the market representing some 70% of all home loans in the United States! There are two distinguishing attributes of conventional mortgage loans: they are not insured by a government agency, and the size of conventional loans cannot exceed conforming loan limits set by the Federal Housing Finance Agency (FHFA).

While traditional conventional loans require a 20% down payment, there are now conventional loan programs that require as little as 3% down. Borrowers will need to pay for mortgage insurance until you reach 20% equity in the home. In terms of credit score, borrowers will generally need a FICO score of 680 or higher.

Conventional loan borrowers have the choice of opting for either adjustable-rate (ARM) or fixed-rate loans, depending on their plans for the property. While many folks prefer the reliability of a fixed rate that stays the same over the life of the loan, some will choose an adjustable rate if they want to take advantage of the lower rate and don’t plan on staying in the house long enough to be at risk of seeing their payment increase.

Borrowers who are refinancing also often choose conventional loans to save money compared to their existing mortgages. For example, FHA borrowers may transition to a conventional loan in order to eliminate mortgage insurance while getting a better rate.

Another key benefit of a conventional loan is its flexibility to be applied to many kinds of properties. Conventional loans can be used to finance a primary residence, a second home, or a rental property.

Why are conventional loans so popular? Borrowers gravitate to conventional loans because of lower interest rates, fast loan processing, diverse down payment options, varied term lengths on fixed-rate mortgage, and reduced private mortgage insurance.

Are you looking to take out a conventional loan? RLG has the tools and resources at its disposal to get you on your way and not waste a moment of your time. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

The Perfect Loan Does Exist

Hand of Business people calculating interest, taxes and profits to invest in real estate and home buying

Almost all of us old enough to buy a home remember the 2008 subprime mortgage crisis that sent the country into a recession. In the aftermath of the crisis, a number of measures were taken to bring more transparency, reduce the likelihood of future financial woes, and end taxpayer bailouts. These enhanced protection standards led banks and lending institutions to further tighten underwriting guidelines.

As Fannie Mae and Freddie Mac began applying more scrutiny to mortgage loans they had purchased, more lenders were forced to buy back the mortgages at face value and absorb any losses. Large financial institutions suffered billions of dollars of losses repurchasing these loans from Fannie and Freddie. Smaller mortgage originators then began to absorb grave losses as larger financial institutions required them to follow suit. This created a snowball effect and shuttered many small businesses. To counter the threat of loan repurchases and stay afloat, the surviving small and medium-sized mortgage originators set out more stringent underwriting procedures and guidelines.

These days, the perfect loan is not one that involves large sums, an irreproachable credit score, or a hefty down payment, but rather one that meets the credit underwriting standards for the type of loan you are applying for and one that you can corroborate with documents. Every single aspect of your financial life has to be checked, verified, and reviewed once more before approval. What underwriters look for are a history of consistent payments and a paper trail to back that up. In this way, lenders can detect loan defects at origination and minimize the risk of a buyback loss.

The lending process typically starts with the prequalification. A loan prequalification is an estimate for credit given by a lender based on information provided by a borrower. At this critical stage, the mortgage planner will request information over the phone or through an online form about things such as employment, income, assets, and credit score. They may also obtain soft credit inquiries, which do not affect an individual’s credit score. At Ridge Lending Group, we complete 90 percent of our due diligence on the front end of the transaction in the prequalification phase.

For the final approval, the borrower will need to provide all the supporting documentation to the lender. The mortgage underwriter is tasked with validating the information therein and approving your loan. Nowadays, most mortgages are approved by automated underwriting engines such as Desktop Underwriter, and the automated system will indicate what documents are still necessary to verify the inputs. Once the mortgage underwriter collects those and other documents they may require, the loan file is then re-submitted to Desktop Underwriter.

As you can see, the perfect loan boils down to proof. While the day is yet to come when the process will be far more streamlined, you will want to produce every required paper in full. If a document includes multiple pages, such as bank statements, make sure to include every page of it, even ones marked “intentionally left blank.” Do not hesitate to ask your loan officer for precise instructions on how and where to submit the information. When a loan application becomes a source of frustration, it is often due to miscommunication.

For helpful tips on getting started in real estate investing, subscribe to our YouTube channel. You can also contact us regarding commercial properties by calling 855.747.4343 or sending an email to info@ridgelendinggroup.com. Also, visit our website for any additional questions related to investment property funding.