What Are the Hard Money Loan Requirements?
Are you wondering if you qualify for a hard money loan in 2020? What are the average hard money loan requirements? We outline them here.
The volume of property flips in America is substantial. In 2016, there were over 300,000 fix-and-flips, amounting to a $56 billion market.
Whether a buyer is looking to purchase a fixer-upper or a newly renovated home, homeownership rates are high, at a rate of almost 65%.
Many Americans take out traditional bank loans when it comes to purchasing a new home. But conventional bank loans are trickier than hard loans.
The requirements for traditional bank loans are lengthy, whereas hard money loan requirements are not as demanding.
But why would one opt for a hard money loan over a traditional one? What are the hard money loan requirements?
To learn all about how to get a hard money loan, and what the rates and requirements are, keep reading!
What Is a Hard Money Loan?
Also referred to as a short-term bridge loan, a hard money loan is a type of loan secured by real property. Hard money lenders are individuals or private companies, not banks.
While they may have once been considered to be the last resort option, hard money loans have grown in popularity, and it’s possible to find a great deal if you explore your options.
Hard money loans typically use a property as collateral for the loan. Traditional banks, on the other hand, base their decisions on things like:
- The creditworthiness of the borrower
- The financial history of the borrower
- The borrower’s ability to repay
The process for acquiring a traditional bank loan can be lengthy and tedious, as the lender takes time to investigate an individual and their credit history.
Hard money loans are more concerned with the collateral. If a borrower fails to pay, the lender takes the real estate as repayment for the loan.
How Long Does It Take to Get a Hard Money Loan and How Long Do They Last?
Hard money loans often get approved and funded within days.
Most hard money loans are for 1 to 3-year terms. Hard money loan rates typically have higher interest rates, which is why it makes sense to get one if you plan to pay it off quickly.
Lots of property flippers use hard money loans because they plan to renovate and sell the real estate within a year, and they use that real estate as financing for the loan.
In a case such as this, the high cost is offset by the fact that the borrower plans to pay off the loan quickly.
Who Should Use a Hard Money Loan?
The main reason why borrowers opt to take out a hard money loan is due to the ability of the loan to get funded quickly. In most hard money loan situations, the money is funded within a week. A traditional bank loan, on the other hand, typically takes 30 to 45 days.
If a real estate investor is attempting to acquire a property with lots of competing bids, a quick close with a hard money loan is sure to get the seller’s attention.
Those who have been rejected by multiple banks for a conventional loan may also choose to go with a hard money loan. Things like foreclosures, short sales, credit issues, and income history can significantly impact one’s ability to get a traditional bank loan.
Even if a borrower falls into a higher income bracket, if it’s a new job and there isn’t significant income history to back it up, bank lenders could still deny the applicant.
Hard money lenders tend to look beyond all these issues, as long as the borrower has enough equity invested in the property.
Hard money loans are excellent choices for situations like:
- Land loans
- Construction loans
- Fix and flips
- If the buyer has credit issues
- When an investor has to act quickly
When traditional banks aren’t an option, and a borrow needs cash fast, hard loans are the perfect solution.
How to Get a Hard Money Loan
Hard money loan requirements vary from lender to lender. Because hard money loans often come from private individuals or companies, there’s more room for negotiation.
In general, there are 3 main hard money loan requirements.
The main requirement for getting a hard money loan is having the required down payment or equity in a particular property to use as collateral for the loan.
The minimum amount usually ranges from 25% to 30% for residential properties, and 30% to 40% for commercial ones.
Sometimes, a lender will allow a borrower to use multiple properties to secure 1 single loan. The term for this is “cross-collateralizing.”
A borrower has 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.
Overall Financial Strength
Another common hard money loan requirement is that the borrower has the necessary cash reserves to make any holding costs and monthly loan payments. Holding costs can include things like HOA payments, taxes, and insurance.
The higher the amount of cash reserves that a borrower has, the more likely they are to get approved for a hard money loan.
An applicant without any cash reserves will usually have a hard time obtaining a loan. However, there are some cases where a lender is willing to increase the loan amount and hold back some of the borrower’s funds to cover loan payments, insurance, taxes, and other holding costs.
In such a case, the borrower still gets their loan, but the lender ensures monthly payments aren’t neglected.
Experience in Real Estate
Most hard money lenders want to get a glimpse into the borrower’s experience in the real estate market.
A borrower trying to finance their very first fixer-upper might have a harder time getting a hard money loan than a real estate veteran.
If the borrower has little experience, the lender will ask for the details of the project, including an exit strategy for the property at hand. Essentially they’ll want to know how the borrower plans to repay the loan.
What Are Hard Money Loan Rates?
The best hard money lenders boast competitive loan rates, but if something seems too good to be true, it probably is. Before signing on the dotted line, make sure you’re making a deal with a reputable lender.
Depending on the lender and their perceived risk of the loan, interest rates typically range from 10% to 15%.
Points can range from 2% to 4% of the entire amount loaned. Points on a hard money loan are the fees that the lender charges for providing the loan. Each point, more or less, equals a percentage point of the loan.
How to Find the Right Lender
With a little research, asking around, and reading reviews, it’s not difficult to find the right hard money lender.
Even though you might be on a time crunch, make sure you ask questions to determine if you’ve found the right lender for you.
Here are some questions to ask potential hard money lenders:
- Are you a broker or the actual lender?
- What project details/documents do you need to provide a quote?
- Do you check personal credit?
- What kind of credit score are you looking for?
- How long does it take to get a quote?
- Where does your money come from?
- What happens if I need to extend my loan?
- How do you handle interest? Is it monthly, upfront, or at the end of the loan term?
- How long have you been lending?
Even if you’re in a rush to get cash, don’t hesitate to make sure that you’ve found the right lender for you and your borrowing needs. Avoid a financial error with these 5 mistakes to avoid with hard money loans.
Hard Money Loan Requirements Aren’t Set in Stone
Even though there are general requirements for hard money loans, they aren’t set in stone the same way that traditional bank loans are.
Depending on the individual or the company, many hard money lenders are willing to work with potential borrowers in ways that traditional banks aren’t.
If you’re looking for a short-term loan and you have a solid exit plan, a hard money loan could be the perfect solution to your borrowing needs.
Take a Moment to Find the Right Lender
Hard money loans are excellent solutions to a variety of borrowing needs, especially concerning real estate.
There are many situations in which a hard money loan is the better option for securing the funds you need to purchase, build, or renovate your property.
If you don’t meet the hard money loan requirements, talk to your lender about potential negotiations as hard money lenders are more willing than traditional banks to work something out.