Hard money loans are a source of funding that real estate investors often overlook. Hard money loans are a good financing solution for people who don’t qualify for traditional financing or for those who want to avoid paying exorbitant rates and fees. It allows people to acquire investment properties quickly, with the property being purchased with the loan proceeds and the seller usually covering closing costs.
Private individuals and companies typically offer hard money loans as opposed to traditional lenders like banks. Because there are no lending guidelines in hard money loans, they also have lower interest rates than bank financing.
There are a number of hard money loan requirements that must be met before you can close on a hard money loan. These guidelines will protect the lender and give you ample time to complete your property renovations and make it to market quickly. This is important because time is money when working with hard money loans — the interest accrues daily at an accelerated rate. It’s also important to get a proper appraisal for the property’s current condition and to provide all necessary paperwork to the lender.
Hard Money Loan Requirements
- The Hard Asset
- Equity/Down Payment
- Strong Personal Finance History
- Experience in Real-Estate
The Hard Asset
Hard Money lenders buy assets using cash as collateral. The property’s value and its resale value are two primary factors that make hard money lender steps that make businesses and homes attractive to investors. Some lenders will require a first lien position, which is almost always paramount to other loans in existence on a property.
Most private lenders will factor in the loan-to-value ratios (LTV) to determine if the asset provides the credit needed for repayment. The average LTV at or around 65% of the property’s appraised value, with a borrower able to expect a loan in the $160K range for rehabbing a property with a $250K resale value, could be expected by most hard asset investors.
While there are a few different ways to ensure that a hard money lender considers your property as collateral for a loan, the most effective method is having enough equity or down payment. Equity is the amount of profit you have made from the property since you bought it.
Generally, an amount higher than 25% to 30% is considered well equity for residential properties and 30% to 40% for commercial ones. If your land value is already high and your risk factor is significant, cross-collateralization can work in your favor.
Strong Personal Finance History
Suppose you do not have any investment or real estate experience. In that case, some hard money lenders will review your personal credit score and financial history to determine whether or not you can be trusted to repay a hard money loan. If they deem you trustworthy and creditworthy, they may approve your loan even though other traditional lenders such as banks and venture capital firms do not require these elements.
Experience in Real-Estate
Thinking about getting a hard money loan to flip that fixer-upper? Lenders want to hear about your real estate experience. What is your exit strategy for the property? How do you plan to pay down the loan? How much equity will you realistically make on the deal?