Hard money loans have become increasingly popular over the years — specifically in the industry of real estate. The trend doesn’t show signs of slowing, especially as the real estate market is overheated now, and even not-so-desirable distressed properties are in high demand. And there is no faster way to finance a house requiring some TLC than using cash. And if you don’t have cash in hand, that’s when a hard money loan comes very useful. Everybody says it’s so easy to get qualified for one, but what are the actual requirements?
Even though hard money loan requirements vary from lender to lender, and there is much room for negotiation because you are dealing with private individuals or companies, there are still 3 major loan requirements:
1. Asset for Collateral
In general, a hard money loan is asset-based financing. So naturally, you will have to post a physical property as collateral to qualify for funds if the loan is not paid back.
Unlike conventional loans, which won’t deal with distressed property, your property should be in some to qualify for hard money. The value of the property and its resale value are two primary factors a hard money lender considers when evaluating a loan.
You will have a better chance of being approved with a higher amount of equity or a more significant down payment. The more the borrower has invested in the property, the lower the risk is for the lender. The minimum amount generally ranges from 25–30% for residential properties and 30–40% for commercial properties. Sometimes, a lender will even allow you to use multiple properties to secure one single loan. The term for this is “cross-collateralizing.”
2. Financial Strength
While your credit score doesn’t impact the final decision on complex money financing, keep in mind that there’s a good chance you’ll have to submit a credit check to be considered for the loan. But here, what’s most important is to demonstrate that you can repay the loan in a timely manner. With this in mind, a lender may not be too worried if you have a less-than-ideal credit score, as long as you don’t have bankruptcies or can show a steady cash flow stream.
Like traditional loans, hard money loans still call for a down payment and closing costs to secure the loan. If you can show cash on hand by providing at least two months of bank statements or a certified letter from the bank, then you are likely to get funded faster.
3. Real Estate Experience
If you are new in the fix-and-flip field, you might have a more challenging approval process for the hard money loan than a real estate veteran. But it is not all lost in this case! You just will have to show a good exit strategy to a lender with a clear timeline for a project renovation.
It might be worth setting up an LLC or an S-corp. For one, it is an easy way to protect your assets and limit your risk. For two, some lenders do not issue consumer loans, preferring to work with LLCs and corporations to provide financing as a business transaction.
Compiling a well-organized loan package will make lenders take notice. At a minimum, plan to include LLC documentation, purchase contract for the property, renovation plans, licensed contractor bids, draw schedules, and a project timeline.
If you’ve ever applied for a mortgage or other bank loan, you’ll probably be pleasantly surprised at how easy it is to apply for a hard money loan. There is little (or no) prequalifying involved, and many hard money lenders have a simple online application. Even if you don’t currently have a property in mind, you can still fill out the loan application and receive a hard money pre-approval letter for a specific purchase price. And once you find your dream property, the hard money lender will get you a custom hard money loan pre-approval letter that includes the property’s address. The application process is straightforward, and the question is now only what lender to choose. At Lending Bee, we happen to know just the perfect one.