Unlike traditional bank loans, hard money loans have very lenient requirements with flexible guidelines. For example, a traditional loan may have a very specific minimum credit score requirement for the borrower. For a multi-unit commercial property, it may have a specific debt service coverage ratio and occupancy rate that needs to be met, and historical income numbers may need to show a history of stable income and expenses. These are only some of the many requirements that traditional lenders have for residential and commercial loans, and any deviation from these requirements may result in the loan application being declined.
While hard money lenders have greater flexibility to think outside the box when reviewing your loan request, they typically still require the deal to make sense in some way. For example, they will not simply lend on any property that is underperforming or in poor condition. There needs to be a clear turnaround and exit strategy in place. Hard money lenders may also have specific requirements regarding your personal financial situation, other aspects of your personal situation and the property itself.
Your Personal Finances
While a traditional residential lender may lend up to 95 percent or more of the sales price and a commercial lender may lend up to 80 percent of the sales price depending on the property type, a hard money loan typically has a much lower loan-to-value. You can reasonably expect to make at least a 30 to 40 percent down payment on the project regardless of the property type, and some lenders require even more money invested by you depending on the specifics of the loan request.
With this in mind, hard money lenders will analyze your financial situation to ensure that you have enough money available to make the down payment. In addition, hard money lenders generally have higher fees than a traditional lender. For example, you may pay a lender fee of four to six percent of the loan amount in some cases. Therefore, you also should have enough cash available to pay for this and other related fees. As is the case with many traditional lenders, a hard money lender may require you to have a specific cash reserve available after the closing as well.
Other Personal Factors
Hard money lenders review the entire loan request to determine its strengths and weaknesses. There are specific requirements regarding liquid cash, but there are not necessarily minimum credit score requirements or income requirements. Furthermore, a borrower may not need previous experience with real estate investments or with renovations. While these are not specific factors that a lender would deny a loan request for automatically, remember that the loan request does need to have strong points. For example, if the applicant’s income level is very low, it may be best if he or she had a huge cash reserve in various types of bank and investment accounts. It may also help if an applicant has a proven track record of success with other similar types of real estate projects. If multiple applicants are applying, the strengths of one applicant can balance out the weaknesses of another one in some cases.
As you can see, there is considerable leeway for a hard money lender to examine the financial strengths and weaknesses of applicants provided they have enough cash reserves to cover the down payment and loan costs. Likewise, a hard money lender can get very creative when analyzing different property scenarios. The ability of the applicant to paint a positive picture of the property’s potential is important. In addition, the applicant needs to backup that positive picture with firm research and facts. For example, do not simply state that you plan to lease office space for $2 per square foot after a renovation. Instead, back up your statement by providing research showing actual market rental rates as well as market occupancy statistics. Remember that these should be for “like” properties. You cannot use market data for a Class A office building to support your projections for a Class C office building. Likewise, do not state that you can renovate a building for a specific amount of money. Instead, get a contractor’s written estimate for all of the work that needs to be done.
There are no hard and fast requirements for a hard money loan other than the down payment requirement. However, each lender is unique, and some lenders may have specific factors that they look for in each loan that they approve. Generally, hard money loan requests are reviewed on a case by case basis. If you can make a case that your loan request is exceptionally strong in some way with incredible upside potential, you may be able to find a hard money lender who will extend a loan to you.
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