Hard Money Loan Qualifications.
Investors ask me to send them information on a hard money loan. It is hard to tell them exactly what the qualifications are for financing their project. The options vary greatly because hard money lenders are private investors. Some are individuals others are private trusts or small investment funds. Each private investor creates their own guidelines. Unlike conventional residential mortgage financing there is no secondary market and there are no organizations like Fannie Mae or Freddie Mac t0 establish uniform or conforming guidelines. But each hard money lender has certain criteria that they evaluate. The qualifications that each bridge and real estate rehab lender have in common are:
- The property type and after rehab value.
- The exit strategy.
- The down payment.
- The investors experience.
- The investors credit.
- The investors cash reserves.
There was a time and will be again were the property and the after rehab value of the property was the sole consideration of doing a short term loan to a real estate investor. Whether the deal is commercial or residential investment property this remains the most important key to the deal. The reasons it is not the only criteria is that lenders have been burned by the declining value of properties and the excess of properties available. This means they have to taken collateral for the short term loan and the exit strategy of the borrower did not work. If the investor foreclosed the values have less than anticipated and the cost are more because it takes longer to dispose of these properties. Yet the collateral still remains the most important criteria. The lower the loan to value the better the deal. Even though some lenders will go as high as 65 to 70% of the after rehab value those deals are tough when so many are available at or below 50%. As an investor you should seek to purchase property where all cost involved in purchasing, renovating, and your exit strategy would equal to less than 50% of the after rehab value.
The Exit Strategy.
Almost of equal importance to the collateral to many purchase rehab lenders is the requirement for a solid verifiable exit strategy. If you say you are going to sell it you should have a buyer who is pre-approved and their information needs to be verifiable by the lender. If you say you want to refinance the property then you need to have the income, credit and assets to qualify for a conventional refinance loan. Whatever your exit strategy is it must be verifiable by the lender. This is good for the lender and for you. No one wants to get stuck with non performing assets.
Though there are programs that do not require down payment they are fewer than ever. Most hard money lenders require a down payment. For this reason it is good to be prepared to invest 20% to 30% in your projects. Because there are so many projects available yet funds are limited a down payment makes your project easier to fund. Also if you have poor credit assets help. That said, there are ways to purchase distressed properties with little or no money down.
The credit, assets and experience of the investor play a significant role in the underwriting process. For a real estate investor to qualify they should have good credit, assets and experience. If you as an investor are not strong in all areas then you need to be stronger in others. Meaning the deal with lower than 50% loan to value, a strong exit strategy and or a down payment will be considered favorably even if the credit, income and assets are not the best. Because each private investor has different criteria, it is hard to say one deal will qualify and another would not based on one criteria or another. But, the property, exit strategy and assets are most important. Many deals will qualify solely on the after rehab value of the property, the exit strategy and the down payment. Even though there are no down payment deals available you need to be a strong investor to qualify for them.