A hard money loan, like any other loan, must be applied for and authorized. While a strong credit score does not guarantee you the money, it does signal a hard money lender that you are a reduced risk.
The majority of hard money lenders need rehab and real estate experience. Proof of your qualifications as a successful real estate investor will increase your chances of loan approval and put you in a better position to negotiate a lower interest rate.
Another thing to keep in mind is that hard money lenders, like standard lenders, need property insurance. However, in most circumstances, you’ll need a builders risk policy rather than the less expensive property and casualty insurance required by a regular mortgage. It is more expensive, has specialized coverage, and is not available from all insurance brokers.
How to Apply for a Hard Money Loan
Lenders’ requirements for hard money loans differ. Because hard money loans are frequently made by private individuals or businesses, there is greater space for negotiation.
In general, there are three primary prerequisites for hard money loans.
The primary condition for obtaining a hard money loan is to have the requisite down payment or equity in a specific property to use as collateral for the loan.
The minimal quantity for residential properties is typically 25 percent to 30 percent, and 30 percent to 40 percent for commercial buildings.
A lender may occasionally enable a borrower to use numerous properties to finance a single loan. This is referred to as “cross-collateralizing.”
Borrowers with greater equity or a larger down payment have a better chance of being accepted. The more the borrower’s investment in the property, the lesser the lender’s risk.
Overall Financial Stability
Another frequent criteria for hard money loans is that the borrower has sufficient cash reserves to cover any holding expenses and monthly loan installments. HOA fees, taxes, and insurance are examples of holding expenses.
The greater a borrower’s cash reserves, the more likely they are to be authorized for a hard money loan.
A loan will normally be difficult to secure for an applicant who does not have any financial reserves. However, in some situations, a lender is ready to raise the loan amount and withhold some of the borrower’s cash to cover loan payments, insurance, taxes, and other holding charges.
In such a circumstance, the borrower retains their loan, but the lender assures that monthly payments are not skipped.
Real Estate Experience
Most hard money lenders are interested in learning about the borrower’s real estate experience.
A first-time fixer-upper borrower may have a more difficult time obtaining a hard money loan than a seasoned real estate investor.
If the borrower has minimal expertise, the lender will want project information, including an exit strategy for the property in question. They’ll want to know how the borrower intends to repay the loan.
The Bottom Line
Tighter lending regulations have made obtaining a mortgage more challenging. The good news is that there are actions you can do to increase your chances of loan qualification, especially if you start early. Begin by reviewing your credit report for errors, then focus on increasing your credit score, decreasing your debt-to-income ratio, and aggressively saving for your down payment.