Hard money loans are known for being fast, often taking only a few days to be approved. They are also known for having stringent borrower qualifications. These hard money loan requirements depend largely on the lender you choose to work with. However, some standard guidelines apply in most cases on how to qualify for a hard money loan.
Requirements to Get a Hard Money Loan
Credit Score Requirements
Hard money lenders will most likely have strict credit score minimums, which vary between 550 and 680. If your credit score is around or below 580, you may need to pay off any delinquent accounts before applying for a hard money loan.
The lower your credit score is, the more cash you will need upfront to cover closing costs and other expenses associated with closing quickly on the deal. Another option for borrowers is to add a co-signer on loan, typically an individual with good credit and available cash.
Assets and Liquidity
Hard money lenders will also examine your liquid assets when considering whether you qualify for financing. They may require liquid assets in the form of cash reserves (equivalent to 30 percent of the purchase price) or liquid securities (equal to 40 percent of the purchase price).
Additionally, they will want to see that you have equity in your real estate before approving you for a hard money loan. This equity must be equivalent to at least 20 percent of the total amount you borrow from them.
If you do not own any real estate and buy property using other people’s money, you will need to show that you have additional liquid assets equal to 20 percent of the purchase price.
Another vital part of the hard money loan qualification process is having satisfactory collateral for the property in question. If you are buying a house with other people’s money, each person should contribute at least 10 percent of the purchase price toward an earnest deposit or escrow account when submitting their application.
The down payment amount required by hard money lenders varies but is typically between 5 and 25 percent of the home’s value. For example, if your home costs $200,000 to buy in cash, you would require $10,000 – $25,000 as a down payment from your funds for a hard money loan.
Property Location and Loan to Value
The final main factors lenders consider on how to qualify for a hard money loan are the property location and current LTV ratios. In general, these types of loans are meant for real estate that is not in a prime location or does not have a pristine history.
Your lender will want to know how much LTV ratio you have to ensure at least 20 percent equity in the home. For example, if your home sells for $100,000 in a blue-collar neighborhood where homes typically sell for around $40,000, you would need to borrow up to 80 percent of the total value from a hard money lender ($80,000).
Let’s say instead it is an upscale neighborhood where homes typically sell for $200,000. You would need to secure a hard money loan for no more than 60 percent of the total value ($120,000).
The minimum requirements for a hard money loan usually include the following:
- The borrower must have at least 20% equity in the property being financed: This is determined by adding up your downpayment plus what you owe on your first mortgage (if any) minus what it would cost to sell the property. If you’re already working with another lender, you should talk about what amount qualifies as 20%.
- The borrower must have updated tax returns: These are usually required for all borrowers but may not be listed explicitly as hard money loan requirements.
- Hard money lenders will require that the property being financed is free of liens or judgments before approving your application: This protects their investment if another lender comes along and wants to seize your property because you haven’t paid off a debt.
- Hard money lenders expect borrowers to have good credit scores: This might be included as strict requirements, or most hard money lenders might expect it, so don’t assume that bad credit isn’t going to hurt you here!
A professional hard-money lender will look at the following criteria when determining your interest rate:
- The value of the property being financed
- The borrower’s credit score
- How much he needs, how fast he needs it, and what purpose the loan will be used. A hard-money lender might charge a lower interest rate if he knows that you need to borrow a smaller amount of money and you can take longer to repay it.
What is the Typical Length of a Hard Money Loan?
Hard-money loans are typically short-term – between six months and two years. This is why they’re not considered a traditional mortgage, even though they’re often paid back in monthly installments like a home equity loan or second mortgage.
Since a government agency or a bank doesn’t back these loans, hard money lenders are usually allowed to charge more interest than you’d see with traditional financing alternatives. The average interest rate on hard-money loans is between 12% and 18%.
Is a Hard Money Loan Right for Me?
Investors, real estate professionals (flippers, etc.), and people with bad credit who can’t get conventional financing are the best candidates for hard money loans. The borrowers must contribute at least 20% of the value of the property or properties involved to get approval.
It’s not recommended that everyday homeowners try to get this type of loan unless they have no other choice because they’ll be paying very high-interest rates.
Where to Find a Hard Money Loan
Lenders work on finding deals just like everyone else – by networking with other real estate industry professionals who might be interested in using their services. Some lenders only work with customers they know, while others accept referrals from satisfied previous customers.
Some hard money lenders advertise on the internet and receive loan applications online.
Typical Hard Money Loan Rates
The interest rates for hard money loans are typically between 12% and 18%. Some lenders will charge fees to set up the loan (appraisal, documentation) or roll these costs into the overall amount of the loan.
Fees can easily add 5% to 6% more to your monthly interest rate, so make sure you ask upfront about anything additional you’ll need to pay before signing any contracts.
Finding the Right Lender
Looking for a lender is kind of like shopping for a car – it’s best if you can find one with the best interest rates and terms. Ask for quotes from several different sources before deciding on a lender to work with.
Be sure you understand all of the costs involved, your options if you need to sell your property quickly (because hard money loans aren’t ideal for short-term financing), and how long it will take them to process your application.
Getting the Best Hard Money Loan
It’s essential to shop around when looking for a hard money lender, but remember that not every company will be able to meet your needs. If you find one with reasonable rates and terms, it may make sense to sign up even if they can only lend you half what you need at this particular time.
Another possibility is taking out two separate loans – one traditional mortgage for 75 percent of the value of your property, then using a hard money loan for the remaining 25 percent. This way, you’ll have the cash in hand immediately without having to wait until your house closes or worrying about prepayment penalties.
This post is written by Kendrick Sonnemann.