What criteria are used to qualify a property for hard money?
Many people consider applying for a hard money loan after their loan request has been declined by a traditional bank or a credit union. Others think about using hard money loans because they have heard that these loans can close very quickly. Regardless of why you are considering hard money financing for your next project, you understandably want to ensure that your loan request has a reasonable chance of getting approved before you spend valuable time and energy applying.
Hard money lenders do not generally have a firm set of underwriting guidelines and loan parameters that they strictly follow. In most cases, hard money loan requests are reviewed individually and in detail. If a loan makes sense in the lender’s eyes, you may expect to be approved for hard money financing. However, you need to know how to analyze your loan request through the eyes of a hard money lender in order to have a better idea about the likelihood that your request will be approved.
Basic Loan Requirements
While hard money loan requests are reviewed individually, keep in mind that each lender usually has specific basic requirements. For example, a commercial hard money lender may only make loans up to 60 percent loan-to-value and up to $5 million dollars. This lender may only lend on multi-family and multi-tenant office buildings. Each hard money lender typically has specific requirements such as this, so it is important that you review the published loan requirements for various lenders. These are usually found on the lender’s website. Remember, however, that the actual interest of the lender as well as the loan terms that you may receive will be based on an in-depth review of the loan request.
The Merits of the Project
Some applicants use hard money loans as a convenient source of fast cash when they do not have time available to wait for a traditional loan to get approved. For example, you may have a loan request that could be approved for traditional financing. It may have minimal risk associated with it, but you may have a balloon payment due within a few weeks. This type of project has strong merits, and qualification with the right lender may be fast and easy.
Many other applicants who are interested in hard money loans need financing because the details of their loan request do not qualify for a traditional loan. The property will need to be renovated or repositioned in some way before it can qualify for permanent financing or before it will be ready to list for sale for top dollar. With this type of hard money loan request, the lender will look at the merits of the project. For example, the property may be rundown and have low occupancy right now. However, a detailed renovation plan with a contractor’s estimate may be provided in the loan request. Furthermore, a realistic projection of property value and cashflow after the renovation is completed may be provided in the loan request. If the details in the loan request show strong merit with considerable potential for legitimate upside, qualification is likely with many hard money lenders.
This is just one of many examples of how a hard money loan can be used to fund a project that makes financial sense but that does not fit into the mold for a traditional loan. Before applying for a hard money loan, ensure that your loan request has strong merits. More than that, obtain all supporting documentation that backs up your claims.
Steps for Qualification
With some traditional loan programs, you can obtain a reasonably close estimate of loan terms and lender interest over the phone or via email. However, because hard money loans are each unique and are individually reviewed, it is not possible to accurately say if a loan may qualify for hard money loans until the lender actually reviews concrete information about the loan request. You can get started by looking for hard money lenders who regularly make loans for your property type and general scenario.
The next step to take is to create a detailed package that provides a written outline of the scenario and all supporting documentation. When you submit this package to lenders who offer the type of loan that you need, you can get a solid understanding of each lender’s interest and potential loan terms.
One of the great benefits of hard money loans is that there are not strict qualification requirements. Each hard money lender reviews loan requests in different ways, and they all typically look at loan requests that are not suitable for traditional loan programs. If you have a potential hard money loan request, you can begin the financing process by making a list of reputable lenders that offer the type of hard money financing that you need.