When standard loans or mortgages are not available to someone, it might be a good idea to explore non-traditional options like hard money loans.
What's in this article?
Hard money loans can appear overwhelming or even “scammy.” That’s why it’s important to do your research. But for the most part, hard money loans are a safe alternative for those with unique situations.
In this article, we’ll look at what hard money loan requirements might be and what you can do to navigate them.
Let’s explore the ins and outs of hard money loan requirements and see if they match up to your needs.
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What Is A Hard Money Loan?
To understand hard money loans requirements, let’s start with the basics.
Hard money loans are a class of loan that uses real property as security rather than the borrower’s creditworthiness. In other words, the loan terms are based primarily on the value of the property used as collateral, not on the borrower’s financial stability.
The lender tends to be an individual or private company, and not a financial institution like a bank.
Hard money loans are generally considered ‘last resort’ loans or short-term bridge loans. Real estate transactions are the most common reason people pursue these types of loans.
Hard money loans have two main advantages:
- A more flexible standard for the financial standing of the applicant
- Quick turnaround for approvals if time is a significant factor
What Are Common Uses Of Hard Money Loans?
Short-term financing is the most common scenario for hard money loans.
That includes quick renovators who flip properties and plan to resell them as soon as possible.
If a borrower has poor credit, for example, or they’re self-employed, a hard money loan can help purchase a home.
It can also be helpful to stave off foreclosure due to its quick turnaround. Some other uses include purchasing an investment property or commercial property.
How Quickly Can A Hard Money Loan Be Approved?
Private investors and companies can evaluate a hard money application faster because they focus on the collateral rather than the applicant’s financial position.
Property can be easier to evaluate than a person; there are no thorough reviews of credit reports, tax statements, or bank statements. The process can take a week or less.
Plus, the process can be even smoother if the lender has a pre-established relationship with the borrower.
What Are The Terms Of A Hard Money Loan?
Usually, these loans are considered short-term; most are completed within one to three years due to the high interest rates. This enables the lender to recoup their investment faster and turn a profit.
Some hard money lenders, however, offer longer term loans for those hoping to secure an owner-occupied loan as a mortgage.
Does A Hard Money Loan Require A Downpayment?
Because the rules are more flexible, hard money loan requirements may not include a downpayment, a significant advantage compared to conventional loans. This depends on your lender. And if the downpayment is also borrowed, it won’t necessarily change your eligibility.
But because the LTV (Loan-To-Value) ratio for these loans tends to be smaller, the lender may only be willing to give 70 to 80% of the appraised value. The borrower will have to come up with the remaining amount.
So, A Hard Money Loan Requires An Appraisal?
Yes, but most lenders calculate the amount they’re willing to loan based upon the property’s After-Repaired Value (ARV). That means they often assess the projected value of the collateral after renovations are complete.
How Do I Get A Hard Money Loan?
Because the lender is a private individual or company, hard money loan requirements can vary. There’s also more room for negotiation.
There are generally three main hard money loan requirements.
1. Downpayment/ Equity
Either a downpayment or equity (in the form of property) can be used as collateral for the loan. The minimum percentage needed usually ranges from 25 to 30% for residential and 30 to 40% for commercial properties.
It’s also possible for a borrower to offer several properties to secure a single loan, something called ‘cross-collateralization.’
The general rule is: the greater the value of the downpayment or equity, the greater the chance for approval.
2. Financial Strength
A typical hard money loan requirement is proof that the applicant has enough cash reserves to cover holding costs plus monthly payments.
Borrowers should have enough in their vaults, so to speak, to pay for closing costs like Home Owners Association (HOA) payments, insurance, and taxes. Having these reserves handy can make approval more likely.
Even so, some lenders are willing to hold back some of the applicant’s funds to cover those costs and increase the loan amount. In any case, the monthly payments are crucial.
3. Real Estate Experience
Imagine trying to finance a fixer-upper for the first time versus a veteran renovator who’s on their tenth flip house. Beginners can be approved but will likely face a more difficult road.
If the applicant is light on real estate experience, the lender might ask for more details regarding the project, including exit strategy and resources available.
You’ll likely be asked to submit the scenario of your loan including what your plans for the property are and how you plan to pay back the loan.
It is true that an established relationship with a private lender will help your chances, but you can help yourself as a first-time investor by being prepared and thorough with your request.
How Do You Find A Hard Money Lender?
Locally owned mortgage companies or your local real estate agent have a good chance of having contacts you could reach out to for a quote.
Some mortgage companies or brokers may also have programs similar to hard money loans but with more traditional requirements.
Timing can be essential for many of these lenders as they might be loaning out money every 6 to 12 months. If your loan is turned down, that may have little to do with your situation and more about their available funds at that moment.
When researching your potential hard money lender, keep these in mind:
- Does the lender have a good reputation? Can you check out the experiences of previous borrowers?
- Keep it local. Lenders who are familiar with the area you’re looking to buy in are likely to be more open.
- How fast can they finalize approval, and how fast can they get you the funds?
- Finally, the interest rates and points they charge can be crucial to your calculations.
The Bottom Line: Hard Money Loans Pros And Cons
If you’re looking for more detailed information, check our in-depth guide for hard money loans. In the meantime, here is a summary of the pros and cons of hard money loans:
- Quicker approval process
- Approvals are based on collateral, not credit history
- Greater flexibility
- Higher interest rates
- Possibly large down payments
- Short-term financing only
- Higher risk
The increased flexibility and quick turnaround time of hard money loans can give an advantage to borrowers who can’t go the traditional route. However, you need to consider the greater risk involved and tread carefully if you’re not experienced with these loan types.
Suppose your mortgage application has been denied, and other choices like rebuilding credit or employing state and federal mortgage programs (like Federal Housing Authority home loan) are not viable. In that case, hard money loans might be an option.
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We can give you more information to inform your decision and match you with the perfect private lender for you.