Hard money loans are an excellent resource for financing your next investment property.
This alternative funding option has gained popularity with real estate investors as traditional lenders become more stringent on their lending practices.
Hard money loans are asset-based lending financing solutions in which a borrower accepts money secured by a real estate property. These loans can provide you with the funds needed to purchase and rehab or repair an investment property in as little as one day, allowing you to quickly take advantage of investment opportunities.
Hard money lenders mainly focus on the value of the property instead of the borrower’s credit score. As a result, the requirements for hard money loans differ from more traditional, conventional loans provided by banks or credit unions.
Let’s break it down into further detail.
Credit Check
The lender will conduct a credit check on you and your business. They want to make sure you have a history of repaying debts. The better your credit score, the better chance you will be approved for the loan.
However, even if you have bad credit, there’s still a chance you’ll be approved because most hard money lenders don’t base their lending decisions on credit scores.
The minimum you’ll need is 600, but if the score is 650 or higher, that’s even better.
Down Payment & Equity
To qualify for complex money financing, the borrower must be able to put up a substantial down payment — usually 20% or more of the home’s total cost. Down payments are among the most critical factors in qualifying for a loan; they demonstrate that you have skin in the game and will be motivated to make timely mortgage payments.
In addition, having equity in your home means you can build capital on your investment, which will serve as collateral against future loans.
The Collateral
The most important qualification for any kind of loan is collateral. In other words, the borrower needs to have something to pledge as collateral to receive the loan. For a hard money loan, that collateral is real estate with equity. The lender will then pledge the property as collateral to back the loan and guarantee repayment.
Loan-to-Value (LTV)
Loan-to-Value (LTV) is how much you owe on the property compared to what it’s worth. For example, if you have $100,000 left on your mortgage loan, but your home is only worth $150,000 today, your LTV is 67 percent ($100K/$150K = .67).
Another essential thing to know about LTVs is that hard money lenders have different requirements for different LTVs. Some will only lend up to 75%. Others may go up to 85%. Generally speaking, the lower the LTV, the easier it is to qualify for a loan.
Finding the Right Hard Money Lenders
Now that you understand what is generally required to qualify for a hard money loan, let’s look at a few notable guidelines you might need to consider when looking for the right hard money lender for your business needs.
1. Work With a Lender, not a Broker
Not all hard money lenders work the same. You’ll find that some of them aren’t even lenders at all but brokers who use your information to find an actual lender to help you get the money you want.
2. Work With a Lender Who Understands Your Industry
If possible, try and work with a lender familiar with your line of work. This way, you’ll find someone who knows your needs better and can give you the best rates.
3. Insist on Transparency
Do not put your signature on any documents that you haven’t read. Some hard money lenders don’t adhere to or bypass standard industry practice and might fool you into taking a bad deal.
The Final Word
If you are in a situation that requires quick funding for a real estate project and don’t have time to wait around for a traditional bank loan, hard money loans may be the perfect fit.
The most important thing to remember is that to get a hard money loan, you must have already found a property you’re interested in purchasing. This gives the lender something tangible to work with when determining your eligibility for a hard money loan.
