Qualifying for a Hard Money Loan – Not Everybody Gets One
The internet is rife with misinformation about hard money loans. For example, it’s not abnormal to find sites claiming that just about anyone can get a loan. It is not true. While qualifying for hard money might be easier compared to getting a traditional loan, not everyone who applies succeeds. Not everybody gets the loans they want.
The Basics of Hard Money
Understanding hard money qualifications begins with understanding the basics of hard money itself. Hard money lending is so named because lenders base approval decisions on hard assets. That should key you in on at least one of the qualifications borrowers have to bring to the table.
It is also important to note that hard money lending is private lending. That means hard money does not come from banks and credit unions. It comes from private investors who choose to lend their money, either directly or through a company organized to manage their resources.
Finally, hard money is regulated at the state level. But hard money lenders don’t follow the same rules and regulations that apply to banks. They are subject to a different set of rules that gives them far more flexibility in what they do.
3 Qualifications for Hard Money
With hard money basics out of the way, let us talk about what’s necessary to qualify for a loan. Private lenders can require just about anything they want. As a general rule, there are three qualifications nearly every lender requires:
1. A High Value Asset
Since hard money lending is based on assets, lenders require borrowers to bring high value assets to the table. Those assets act as collateral on the associated loans.
A Salt Lake City, UT investor might approach Actium Partners for a hard money loan to obtain a new property. That property will be the asset Actium looks at. It needs to have enough value to cover the amount being requested, and then some. Actium will not approve the loan if the property is not valuable enough.
2. A Significant Down Payment
The second qualification for hard money is a significant down payment. How much will a borrower need? That depends on the lender. It is not unusual for lenders to require 50% down. A borrower might get away with a lesser amount if he is looking at a less risky deal.
One thing is for sure: a borrower isn’t going to get a hard money loan with 0% down. Even 10-20% down payments are rare. Hard money loans are risky. Therefore, lenders require significant down payments.
3. A Reasonable Exit Strategy
Traditional loans don’t require an exit strategy per se. It is understood that the borrower will make monthly payments over the entire life of the loan. That’s not how hard money works. Most hard money loans are structured as interest-only loans. Borrowers make monthly interest payments followed by a lump sum principal payment at maturity.
Lenders want to make sure the borrowers have a plan in place for making that lump sum payment. Therefore, they require that borrowers submit a reasonable exit strategy with their loan applications. One example of an exit strategy is lining up a conventional loan after an investor’s target property has been acquired with hard money.
Qualifying for hard money loans is easier compared to conventional loans. But not everybody who applies gets approved. Hard money still has qualifications attached to it. Not only that, but lenders also are not always willing to invest in any project that comes across their desks. All this is to say that obtaining hard money isn’t as easy as some people make it out to be.
