Hard money loans are an excellent financing option for many real estate investors. They are used by investors who need to close quickly. In addition, they provide greater flexibility than what traditional mortgage lenders provide. Hard money loans are made by private lenders, so they do not need to comply with the same banking regulations that apply with traditional mortgages. Because these are short term loans, they are popular among real estate investors for fix and flips as well as in competitive markets where a fast closing is essential. Hard money loan requirements differ in many ways from a traditional loan.
How Does a Hard Money Loan Work?
Hard money loans are made by asset lenders, equity companies and investment lenders. These can be individuals with deep pockets or businesses. One of the major loan requirements for hard money lending is the use of real estate collateral. The loan amount is typically based on the property sales price or value. However, the hard money lender may extend a loan amount to cover the purchase of the property as well as some or all renovations.
Hard money loans have shorter terms. The term length is usually between six and 12 months. However, exceptions may be made in specific situations. Hard money loans have a higher interest rate than a traditional loan. There is flexibility in the payment options.
What Are Hard Money Lender Requirements?
The hard money loan qualifications differ from those of traditional loan requirements in several ways. With a traditional loan, the lender is interested in your debt-to-income ratio, credit scores and liquid assets. Generally, the lender reviews the property inspection and appraisal to ensure that the asset’s condition meets their standards. Appraisals and property inspections are not always required with hard money loans.
For income-producing property, traditional lenders also look at things like tenant leases and cash flow. How do these requirements differ from hard money loan guidelines?
Collateral
Generally, a hard money loan uses the new property that you are buying as collateral. This property is at risk of default if you fail to make on-time payments. It is also at risk if you fail to pay off the loan amount on time. Often, this type of flexible loan is used to buy a reno project. The hard money loan amount is based on the lesser of the current value or sales price rather than the estimated improved value.
Cashflow
While a traditional lender reviews an investment property’s cash flow, this is not the case with hard money lenders. In fact, hard money loans are available for investment properties currently producing no income.
Down Payment
A hard money lender also reviews your down payment amount. The loan-to-value for a hard money loan depends on the situation and the property type. Single-family and multi-family properties may qualify for 75% to 80% loan-to-value in many cases. However, the specific LTV available for your project may be determined by the lender after reviewing your loan request. The lender generally needs to see the money in your bank account through a recent bank statement or another form of verification. In addition, the lender reviews your equity in the project at the time of purchase. Your anticipated equity after the renovations are made is also reviewed.
Liquidity
Hard money loans are risky to the lender, and this is one of the reasons for higher hard money loan rates. To gauge this risk, hard money lenders review an applicant’s liquidity. By doing so, it ensures that the exit strategy is feasible. For example, does the applicant have enough cash on hand to make the down payment and pay closing costs for the loan? Are funds available to complete planned renovations and apply for a takeout loan, if applicable? A hard money lender also looks at cash reserves after these various known expenses are taken into account. In some cases, the lender may increase the loan amount to cover the renovation costs. This directly reduces the funds needed by the borrower to complete the project.
Credit History
An applicant’s credit history plays a major role in the ability to get approved for traditional financing. This is not the case with hard money lending. While a hard money lender may review your credit history, you will generally not be disqualified simply because you have a spotty credit history or a foreclosure in the past. The lender reviews all relevant factors and is more interested in other factors. These include the borrower’s assets and equity in the project, the project budget and the exit strategy.
Experience
Hard money lenders are exposed to considerable risk by extending their loans. So, they pay attention to an applicant’s previous experiences with similar projects. Even those with no previous experience with real estate investing may be approved for a hard money loan. However, other factors may be reviewed more closely. Some of these factors include the applicant’s assets and equity in the project.
Project Budget
In many cases, a project budget plays a key role in the application and approval process. The budget should be detailed with a line-item list of renovations. It also should include related costs to execute the exit strategy. If the applicant will be the contractor, include actual estimates from subcontractors. Otherwise, include an estimate for the full scope of the project from an experienced, licensed general contractor.
Exit Strategy
Because a hard money loan has a short term, the lender reviews the exit strategy. Do you intend to sell a fix-and-flip project? If so, do you have enough time and resources to complete the work and find a buyer? Another exit strategy is refinancing the hard money loan with a traditional mortgage. The hard money lender looks at your ability to qualify for a traditional loan after planned improvements to the property are made. Can the traditional mortgage be in place before the hard money loan’s expiration date? These questions are answered during the loan application process.
Executive Summary
Underwriters for traditional mortgages may spend weeks reviewing an application. A hard money lender often decides its interest in a day or two. Hard money lenders need to see a summary of the project so that the scenario is clear. This may include bullet points for the loan amount, the down payment, the renovation cost and the exit strategy. More information can be provided in paragraph form. Generally, an executive summary is a page or two long. The executive summary is typically the first item in the loan request package. Supporting information should be provided in an organized fashion. This allows the lender to easily find essential documents and information.
Do You Qualify for a Hard Money Loan?
Hard money loans are made by private lenders, so the requirements for approval are unique. They are directly tied to their specific tolerance for exposure to risk. The requirements are also based on the lender’s standards and expectations for the applicant and project. As a result, hard money loans are more flexible than traditional loans. They are well-suited for applicants who have a spotty credit history. Hard money loans are also used when there are other factors that may prevent the applicant from getting a traditional loan. The differences in hard money loan guidelines and loan terms from lender to lender. Because of this, a thorough review of the options is essential.
Macoy Capital is a hard money lender that focuses on delivering a stress-free borrowing experience. It offers flexible guidelines and fast closings. To discuss your loan request with a representative, contact Macoy Capital today.
