If you’re interested in applying for a hard money loan to purchase a property, then it’s important to know what the lender will be looking for when deciding whether to approve your application. Fortunately, there’s one factor that reigns supreme, making it somewhat easier to figure out your chances. Here’s what that key factor is, as well as some other items lenders will typically look at.
The Property Is Most Important
The simplest answer is often the correct answer, and that’s true when it comes to hard money loans. If you are used to your credit score and income being the deciding factors on loan applications, you may be surprised to see that they aren’t in this situation. The reason for this is how hard money loans work.
Since hard money loans have a balloon payment at the end of the term, lenders are most concerned with whether you’ll be able to pay that entire amount back, and that depends on the value of the property that you’re buying with the loan. Therefore, the lender will look at the property’s current value compared to the amount you’re interested in borrowing. This also means that the amount of money you’ll be putting down on the property is important.
It’s normal for hard money lenders to issue loans covering anywhere from 60 to 80 percent of what the property is currently worth. There are, however, exceptions to this. You could find a lender that’s willing to use the after repair value (ARV) of the property when deciding on a loan application. The ARV is simply an estimate for how much said property will be worth after you make repairs and upgrades to increase its value.
When a hard money lender uses the ARV instead of the current value, this obviously results in more risk on their part, as there’s no guarantee what the property will be worth in the future. This means that you can expect a higher interest rate to compensate for that increased risk.
The bottom line is that the lender wants to know is if you’ll be able to resell the property and make enough money to pay them back.
Other Factors Hard Money Lenders Take into Consideration
The property and its value may play the pivotal role in a hard money loan, but it’s far from the only thing lenders use to make their decisions. Since you’ll need to make the interest payments on the loan until you sell the property, the lender will evaluate your current financial situation to ensure you can do that. They will likely consider the following:
- Your income – The most common way to verify this is through tax returns for at least the previous two or three years.
- Your debt – The lender will look at what debt payments you have every month.
If you can verify that you have the liquid capital to make your loan payments, that can help alleviate any concerns the lender has regarding your income.
How the lender feels about you as a borrower can also affect your application. If you have experience renovating properties and flipping them for a profit, that gives the lender some peace of mind compared to if you are a first-timer. Everyone needs to start somewhere and you’re not necessarily out of luck if you’ve never done this before, but it could come into play.
The way you present yourself during the application process can be a factor, as well. When you have a professional, organized approach, that will give the lender a better impression than if you came in without important documents and plans for the property. For the best results, make sure you bring:
- A contract for making the property purchase
- Your plans for the property
- Cost estimates for those plans
Flipping a property requires good organizational skills to keep everything on track and on schedule. Lenders will take note of how prepared you are, and being thorough could make up for a lack of flipping experience.
Qualify for a Hard Money Loan
Since you don’t want to end up wasting any time, it’s important to give yourself the best shot at approval on your hard money loan the first time around.
Choosing the right property and having a concrete plan for it is paramount here, because everything hinges on the lender’s faith in you selling that property for a sufficient amount (or being able to refinance it to pay them back that way). You should also make sure that you can demonstrate enough income or capital, and that you have all the potential documents a lender may ask to see when you apply.